Among the measures adopted by the EU in its 12th package of Russia sanctions in December is a requirement for exporters and suppliers to third countries of certain goods restricted under the EU's Russia sanctions to insert what has been termed a "no re-export to Russia" clause into both new and existing agreements¹. This measure highlights the determination of the EU to further extend the effective impact of EU restrictions and to reduce circumvention. The drafting of this requirement has thrown up a number of questions and the EU Commission has now sought to add clarity through some FAQs (including a template contract term) issued on 22 February 2024 (the Guidance). As at the date of this alert, neither the US nor the UK has yet implemented similar measures, though this cannot be discounted in the short to medium term.

Requirements of Article 12g

In summary, Article 12g of the Regulation provides that: 

• when selling, supplying, transferring or exporting certain categories of goods and technology (Restricted Goods) to a third country (with the exception of specified EU/NATO-aligned "partner countries" (see below)), EU Persons must include in their contracts:
  • a specific prohibition on the re-exportation of those Restricted Goods to or for use in Russia; and
  • provision for "adequate remedies" should the third-country importer/buyer of the Restricted Goods breach the "no re-export to Russia" prohibition; and
• in the case of such a breach by the third-country importer/buyer, the EU Person who had sold, supplied, transferred or exported the Restricted Goods must inform the competent authority of the relevant EU member state as soon as they become aware of the breach.

Entry into force and effect on existing agreements

Article 12g applies to all agreements concluded on or after 19 December 2023 and EU Persons must incorporate the "no re-export to Russia" clause into such agreements by 20 March 2024. Additionally, EU Persons must, by 20 December 2024, incorporate such a provision into agreements that were concluded before 19 December 2023.

This means that all pre-existing agreements falling within the scope of Article 12g must be amended to incorporate the "no re-export to Russia" clause within the timeframes stipulated. 

The EU Commission takes a broad interpretation of what constitutes a "new" agreement i.e. "concluded" after 18 December 2023. For example, amendments and restatements or other forms of tacit or explicit extension of pre-19 December 2023 agreements are treated as separate, post-18 December 2023 agreements which must include the "no re-export to Russia" clause by the earlier 20 March 2024 date.

Key features of the measure

Some key features of this requirement are as follows:

• in addition to exports and supplies from the EU to third countries, the obligation will apply to an EU Person who is participating in such a supply between two or more third countries;
• it not only applies to sale agreements, but also covers a wider range of agreements, such as for temporary supplies, loans or transfers of Restricted Goods, including, for example, aircraft lease agreements;
• the obligation does not apply to exports to "partner countries", namely the US, Japan, the UK, South Korea, Australia, Canada, New Zealand, Norway and Switzerland;
• the goods or technology in relation to which the requirement applies are those listed in the Regulation at Annexes I (firearms and ammunition), XI (aerospace industry), XX (jet fuels), XXXV (other firearms and arms) and XL ("common high priority items", being certain technological components and equipment); and
• EU Person exporters/suppliers should be able to evidence the compliance of in-scope agreements with the Article 12g requirements if requested by the relevant competent authority.

"Adequate remedies" for a breach by the buyer

Article 12g requires that the contract contains "adequate remedies in the event of a breach" of the "no re-export to Russia" prohibition by the non-EU party. The adequate remedies are not prescribed in the Regulation and whether the remedy is "adequate" may vary according to the specifics of the export/supply-related activity. For example, in this regard, sales of goods may require different treatment compared with leases. However, the Guidance clarifies that "adequate remedies" should be "reasonably strong" and aim to deter a third country importer/buyer from breaching the "no re-export to Russia" clause. 

The Guidance provides template wording for the "no re-export to Russia" clause that the EU Commission states can be considered as meeting the Article 12g obligation, especially where the third country importer/buyer is in a jurisdiction seen as posing a high risk of circumvention of EU sanctions against Russia. This EU template wording, found at FAQ 6 to the Guidance, provides by way of remedies: (i) termination of the agreement; and (ii) payment of a penalty calculated as a specified percentage of the total value of the agreement or price of the goods exported, whichever is higher.

Enforceability of the remedies provided for in a "no re-export to Russia" clause

The contractual enforceability of the EU template wording must be considered in the context of the governing law of the agreement for export/supply of Restricted Goods. For example, many international trade contracts are governed by English law. In English contract law, penalty clauses (i.e. clauses that provide for payments for breach that go beyond compensation for losses) have historically been difficult to enforce, although this approach has softened in recent years. This illustrates that, whether using the Commission's template clause or a bespoke clause, careful consideration must be given to the content and drafting of such clause, and the adequate remedies element in particular, to ensure that the remedies are adequate, while avoiding the risk that the provision could be found to be unenforceable. 

Due diligence and reporting requirements in the EU Commission's template "no re-export to Russia" clause

The template provided in the Guidance also imposes due diligence, reporting and information sharing obligations on the importer/buyer, even though Article 12g does not stipulate that these must be included in the "no re-export to Russia" clause. From a wider compliance and risk management perspective, we anticipate that many affected EU businesses will want to impose such requirements in any event, though they may experience significant resistance from importer/buyer counterparts to them as they are not a strict requirement of Article 12g.

Recommendations

• Given the impending expiry of the first wind-down period on 20 March 2024 for post-18 December 2023 agreements, EU businesses engaged in exports or supplies of Restricted Goods should ensure that their standard contract templates are updated to include an appropriate "no re-export to Russia" clause, and review any contracts entered into since 19 December to ensure that all new contracts meet the requirements of Article 12g ahead of the 20 March 2024 deadline.
• EU businesses engaged in exports or supplies of Restricted Goods should also start reviewing pre-19 December 2023 agreements with a view to commencing the negotiation of amendments in short order, given the potential volume of contracts affected and the time it may take to secure and implement them.
• Depending on the volume of the contracts affected, EU businesses may also need to consider the most practical way of implementing the "no re-export to Russia" clause. For example, entering into a separate side letter may be more efficient than amending and restating each affected contract. 

Our sanctions and international trade experts at Dentons are already advising a significant volume of affected clients on navigating the new requirements. If you would like to discuss further how our team may be able to assist with the introduction of "no re-export to Russia" clauses, please reach out to any of the Key Contacts in this article.

1. Article 12g to Regulation (EU) No 833/2014 (the Regulation).↩