Exporters Need to Review their Contracts against the Risk of Re-Exports to Russia

Since the onset of Russia’s war of aggression against Ukraine, the European Union has adopted thirteen sanctions packages, effectively excluding Russia from the European markets in almost all relevant economic sectors. While there are still some areas where restrictions may be expanded or tightened, it is certain that the main focus going forward will be on the prevention of sanctions circumvention.

An example of the growing emphasis on sanctions circumvention is the novel obligation imposed on exporters of critical goods to third countries. Sales agreements of such products are required to be incorporated with a contractual clause prohibiting the re-export of goods to Russia. The initial deadline for implementing this provision is approaching, as such the clause must be incorporated in agreements that are concluded on or after 19 December 2023 by the end of 20 March 2024.

By virtue of the new provision, EU exporters are required to contractually prohibit re-exportation to Russia and re-exportation for use in Russia when selling, supplying, transferring or exporting certain goods to third countries, with the exception of aligned third countries. A “no re-export to Russia clause” will be required in relation to sales to third countries of the following goods specified in the Regulation:

The requirement applies to both existing and new agreements. Companies must incorporate the clause in agreements concluded on or after 19 December 2023 by 20 March 2024. Agreements concluded prior to 19 December 2023 are required to be amended to include the clause by 19 December 2024.

The provision does not mandate any specific wording, as long as it meets the requirements of specificity and adequate remedies. On 22 February, the European Commission published guidance on the new obligation, and also provided a template of the suggested wording of the clause.

In addition to the re-exportation prohibition, the clause must provide the exporter with adequate remedies in case the buyer fails to comply with its contractual obligation. The Commission elaborates in the guidance that adequate remedies may include, for instance, termination of the contract and the payment of a penalty. From a practical point of view, it is also important to consider the enforceability of the remedies in the context of the governing law of the agreement.

The clause should also include an obligation for the buyer to monitor its compliance and inform the exporter of any breaches of the clause, as the EU exporter is ultimately responsible for informing the competent national authorities as soon as they become aware of a breach of the “no re-export to Russia clause”.

Many exporters routinely incorporate sanctions clauses in their sales agreements, reflecting the growing significance and impact of international sanctions in recent years. As such, the content of the “no re-export to Russia clause” is not revolutionary. However, it does add a new element to the list of required due diligence for exporters, and exporters are required to review that their standard clauses meet the requirements imposed by the sanctions regulation.

While many European companies have ceased their exports or provision of services to Russia, they remain exposed to the risks of being abused for sanctions circumvention via third countries operators. The new requirement is also a good reminder that also those companies that are no longer directly present at the Russian markets need to be vigilant in trade with operators based in third countries.

All export companies benefit from clear sanctions compliance related internal controls and procedures. Established procedures improve the efficiency and consistency of compliance-related work and effectively reduce the risk of companies being abused by operators engaged in sanctions circumvention.

If you have any questions about this legal alert, please feel free to contact the undersigned or your regular Borenius contact.