Sanctions Enforcement
Government commitment must complement companies' compliance efforts
Sanctions must have an effect
The situation has remained unchanged for over a year: Russia is waging war in Ukraine with the aim of eliminating the country's statehood. This brazen violation of international law must not be tolerated. German industry stands by Ukraine. We support the sanctions and the foreign and security policy objectives they serve
Enforcement of the EU-Russia embargo must be a joint task
German companies have made enormous efforts since the start of the war and have implemented the EU's Russia embargo. Many companies have gone beyond the sanctions measures and voluntarily withdrawn from the Russian market. Because corporate and governmental export control structures interact effectively in the Federal Republic of Germany, the business community has been able to fulfill its obligations in an exemplary manner. This likewise holdstrue with respect to EU sanctions on indirect goods exports, as was underlined by the 2022 foreign trade audits.
Nevertheless, it is clear that despite the existing sanctions, goods are unintentionally entering the Russian Federation and that the latter has created a complex system to avoid trade restrictions. Unfortunately, the number of states sanctioning Russia has remained relatively limited at just under 50. Countries that account for around 60 percent of the world economy and two-thirds of the world's population do not sanction Russia. This means that in a world of global economic flows the sum of potential evasion options is simply too great for trade controls against Russian procurement efforts to be implemented by individual economic operators alone. The German business community therefore rejects the means of a "transparent end-use certificate" proposed by the Federal Ministry of Economics in February, and instead calls for the government to take on responsibility more directly and to support economic operators by providing so-called "blacklists".
Background
The Federation of German Industries (BDI) and the German Eastern Business Association support the sanctions against the Russian Federation and have done so since the Putin regime's invasion of Ukraine. Russia's war calls into question the principle of rules-based international cohabitation. If even the most fundamental rules of the international order are no longer valid, the global economy can be plausibly expected to disintegrate into chaos, with considerable consequences for Germany's exportoriented economy.
After over 15 months of war and ten EU sanctions packages, German trade with Russia has shrunk at a rapid pace. According to estimates by the German Eastern Business Association, German exports to Russia fell by 58 percent in January 2023 compared with the corresponding month of the previous year. At the same time German imports from Russia fell by as much as 75 percent.1
However, sanctionsenforcement is complicated by thepolitical refusal ofmany states to takea position on the invasion of Ukraine or to actively condemn it. Only the EU and the G7 countries have coordinated their Russia embargoes, with several other countries also supporting them. The rest of the world does not sanction Russia. It can therefore be increasingly observed that Russia is setting up a complex system to circumvent sanctions. Thus, quantitative foreign trade data show what was to be expected qualitatively, which is why the competent Federal Ministry of Economics and Climate Protection (MoE) stated at the end of February 2023:
„The foreign trade data available to us [...] indicate that EU-sanctioned goods are exported to a considerable extent from the EU and thus also from Germany to certain third countries and are further exported from there to Russia [...] The intensified fight against the circumvention of sanctions should therefore also be focused on in an eleventh sanctions package.“2
This assessment has been linked to a ten-point plan which, among other things, provides for increased use of an instrument called "transparent end-use certificates" (EUCs). From an industry point of view, it is important that the following aspect remains clearly understood: There already exists, as a matter of course, a prohibition for European companies to indirectly provide economic resources with Russia as the ultimate beneficiary. Allocating economic resources via third parties is thus prohibited. This is partof companies' internal compliance procedures and sometimes requireseconomic operators to conduct forensic investigations, especially when dealing with new customers. The EU-Russia embargo was already part of the 2022 foreign trade audits in Germany. Indirect provision was part of these audits. Any assumption of nonchalant handling of the applicable legal situation is vehemently rejected by German industry and the German Eastern Business Association.
However, all this does not change the existing problem: the decentralized control of economic flows becomes less accurate the more companies stand between a good's point of origin and its final destination. There is a concrete solution to this, which we will describe in more detail below. However, since
1 Ost-Ausschuss (2023): Deutscher Osthandel Januar 2023. URL: https://www.ost-ausschuss.de/sites/default/files/page_files/01_Deutscher%20Osthandel%20Jan%202023.pdf (retrieved April 3, 2023).
2 Bundesministerium für Wirtschaft und Klimaschutz (2023): Vorschläge zur effektiveren Bekämpfung der Sanktionsumgehung, 23.02.2023; URL: https://www.bmwk.de/Redaktion/DE/Downloads/V/vorschlage-zur-effektiverenbekampfung-der-sanktionsumgehung.pdf? (retrieved March 29, 2023).
political stakeholders have expounded on the issue of end-use certification specifically, we start by outlining the difficulties involved in using EUCs
Sanctions Enforcement
Even more control through business
In its ten-point paper cited above, the MoE has made it clear that it would particularly like to take companies to greater task and calls for a "transparent end-use declaration". It is our understanding that we should therefore shed light on what a regular EUC is.
An EUC is a document used in the cross-border transfer of controlled goods to certify that the buyer is also the ultimate consignee of the goods and does not intend to transfer them or put them to a controlled use without authorization. The content of the EUC may vary by country of destination, consignee, end-user and type of goods. In addition to a detailed description of the intended use of the goods, EUCs contain various further declarations by the consignee or end-user on the use of the goods, as well as re-export reservations. With a re-export reservation, the issuer of the EUC commits to obtaining the approval of Germany's competent export control authority, the Federal Office for Economic Affairs and Export Control (BAFA), prior to any onward delivery to third countries.
EUC: Where export licensing procedures begin
Basically, there are two forms of EUC. The "EUC war weapons" is obviously not pertinent since Russia is a belligerent state. The "EUC dual use" is the method of choice for dual-use goods that can have either a civilian or military application. However, this EUC also applies in principle to all legal transactions that are subject to a possible foreign trade licensing requirement under national or European regulations.
Normally, the following applies: The decision to issueanexport or transfer license is largelydetermined by the examination of the information on the consignee or end-user, the goods and the country of destination. Therefore, the EUC must contain the declarations of the consignee or end-user about the final destination and use of the goods. The contents of the EUC must be coherent with the rest of the application information. The EUC is therefore also of particular importance for the exporter, as the exporter can check the plausibility of the recipient's/end-user's details on the basis of his own information. This means that the instrument of the EUC is only used for the transfers of those goods that are subject to authorization
Why additional EUCs are hardly feasible
In principle an export license does not have to be obtained when trading with countries adjacent to Russia. The use of EUCs thus raises questions because it would create an immense administrative burden for economic operators – but also for BAFA. One thing is clear: BAFA is unlikely to be able to process and review the plausibility of EUCs a priori. Presently, BAFA's capacities do not appear to be sufficient. Even if one assumes that it would be possible to introduce such an EUC-procedure in which customs authorities would be informed of the existence of an EUC, rather than BAFA checking it, this would in practice remain a significanthurdle. For example, itmust beassumed thatordinary household electronics would also have to be certified, since these might contain microelectronics the reuse of which in conventional weapons systems is feasible Therefore, such transactions would constitute a special control imperative. Control practices in recent years have already shown that in such instances
customs authorities systematically demand clearance certificates - i.e. letters of no objection - from BAFA. Such a procedural back and forth would be economically impossible to sustain simply because of the aforementioned resource limitations at BAFA. Should the process of decentralized export controls – i.e. purely within-company not aided by centralized information – still be insisted on, trade with countries adjacent to Russia, but also with Turkey, Serbia, the United Arab Emirates and many other states, would be made significantly more difficult for economic operators. At a time when German companies are supposed to diversify their ventures in order to strengthen their own resilience, this would be a fundamentally wrong signal.
Taking Central Authorities to Task
In addition to companies, the MoE's ten-point paper also takes third countries and society "to task". It should however be considered that market participants cannot reasonably be expected to bear the responsibility for a functioning EU-Russia embargo on their own
Corporate export control and information deficit
German industry acts responsibly. The corporate and governmental export control system in the Federal Republic of Germany constitutes an international gold standard. The position of the chief export control officer in companies and the principle that "export control lies with management" are the mainstays of a reliable and functioning sanctions compliance system. Depending on the company's organizational structure, either the management or the board are liable under both regulatory and criminal law. However, imposing sanction enforcement requirements that are hardly feasible threatens to incur considerable costs with no appreciable gains in effectiveness to be expected
List-based controls in the EU (Blacklisting)
Considering the diminishing marginal utility of a system that levies controls based solely on decentralized information, a supplementary central control instrument appears to make sense. It is therefore the view of German industry and the members of the German Eastern Business Association that the German government should back so-called "blacklists" in the European Union
The MoE also advocates this instrument under the title "stronger sanctioning of circumvention activities". However, the focus is not on measures to increase the pressure on individual companies, but on creating a central register to identify entities that are instrumental in Russia's procurement efforts. The difficulty of creating blacklists is obvious. Data on proven criminal activity by actors abroad is difficult to collect and often relies on covert intelligence work. This makes such information only partially courtproof, and it goes without saying that entities must have rule-of-law recourse to challenge their listings in the courts
Given such reservations, it would be conceivable to have a process that takes to task all those actors whose behaviorgivescausefor concern. Amulti-stageprocess could be created, inwhichactors would be moved from a suspect list to an entity list to a blocked list. Such a process would involve, as a first step, requiring the entities in question to cooperate with authorities and, in the process, having the opportunity to respond to authorities' suspicions of misconduct with their own data and evidence. If a company were then to be listed subsequently as an entity, transfers to this company would be subject to licensing requirements. Should entities so listed continue to engage in the procurement and transfer of sanctioned goods, an entry on the blocked list would follow as a final consequence. Such listed natural or legal persons would accordingly be excluded from trading with EU economic operators and
on the EU internal market. When listing an entity, it should also be ensured that the reason for such a listing is specified in such a way that this data can alsobe used in other corporate compliance contexts
German industry advocates that the European Union should implement such a procedure, because it is apparent that the effectiveness of self-regulation by companies has reached its limit. Data on natural and legal persons that are instrumental to Russian procurement efforts are a public good. This information serves foreign and security purposes and belongs primarily into the sphere of governmental power. The state should, therefore, assume a more active role
Interoperability of the administrative digital infrastructures
The German business community supports improved procedures for monitoring the impact of sanctions against Russia. However, in our view, the road ahead is very long due to inadequate digital infrastructures. Therefore, the proposal by Minister Habeck to involve customs more closely by means of risk-based controls is welcome.3 However, we also fear that German customs will not be able to implement the change from process- to risk-based controls in a meaningful way. There is a lack of capacity in the customs software ATLAS as well as a lack of connection to the BAFA software environment. For example, information often has to be provided to the authorities in duplicate. The systems do not communicate with each other, which is why in this case the workload for governmental and corporate export control would increase significantly. Inour view,and in contrast to the Danish customs authorities mentioned by Minister Habeck, the German customs authority is not in a position to identify questionable transactions through precise data analysis. Instead, it is likely that if German customs were given a stronger control function, clearance certificates from BAFA would be required across the board for shipments to certain regions.
New Partners and Diversification
The supply chain problems during the Corona pandemic, the Russian invasion of Ukraine, but also China's saber-rattling on the Taiwan issue make it clear that one-sided economic dependencies create vulnerabilities. Worse still, Germany and Europe know very well that authoritarian states in particular exploit economic interdependencies in pursuit of their geostrategic goals. Therefore, it is important to anticipate future potential trade policy conflicts with prudence and caution. Now that the Russian economy is in decline due to the G7+ embargo and the Russia market subsequently losing attractiveness, countries adjacent to Russia should not be deterred from forging closer economic ties with Europe The region should not be subjected to wholesale suspicion because of Russian procurement efforts.
In the course of 2022, particularly Kazakhstan, Georgia, Armenia and Kyrgyzstan became preferred destinations for people from Russia who wanted to avoid military conscription or who, as former guest workers, returned to their home countries in the South Caucasus and Central Asia. Armenia alone reported an increase of 55,000 persons of Russian origin who resettled permanently to the country. They contributed to Armenia's per capita income growing by 40 percent in one year, as calculated by the German Economic Team. Kazakhstan is even projected to see an influx of 200,000 people from Russia during 2022. Many thousands more have traveled through and temporarily stayed in these countries. This influx has implications for the respective economies. Armenia, for example, reported economic growth of 12.5 percent in 2022. This exceptional economic situation, which was also
3 Tagesschau (2023): Russlands Krieg gegen die Ukraine – Habeck will Sanktionen besser kontrollieren. URL: https://www.tagesschau.de/wirtschaft/habeck-russland-sanktionen-101.html (retrieved April 8, 2023).
observed in Georgia or Kazakhstan, also explains a permanently increased demand for imports from Germany to these countries. Based on this, we reject a blanket rush to judgement involving entire countries and regions.
Cases of proven circumvention and successful Russian procurement should be taken very seriously and terminated. At the same time, it is not in the European or German interest to generally discourage German exports to these countries by imposing overly burdensome measures. This would not only strain and encumber German trade but would also put pressure on countries that have behaved very distantly towards Russia in recent months and that are themselves interested in closer economic relations with the EU
It is impossible to draw any concrete and factual conclusions about sanctions evasion or successful Russian procurement purely based on statistical increases in exports to individual countries such as Kazakhstan, Armenia or Kyrgyzstan. Moreover, the aforementioned countries are generally cooperative when it comes to preventing sanctions evasion. Kazakhstan, for example, already imposed a general ban on arms exports during the summer of 2022. This cooperation is to be further expanded. On April 1, 2023, Kazakhstan has introduced a new customs tracking system. This new online tool will enable real-time tracking of the entire chain of goods moving from border to border. The country has also been providing energy support to Germany since early 2023, after a German oil embargo against Russia took effect. This cooperation is to be expanded further
It is thus important to note that trade figures alone cannot be used to make a politically meaningful and sustainable diagnosis of the problem and its potential solutions. There can be no purely quantitative diagnosis of a qualitative problem. Moreover, the federal government's statistical surveys do not yet control for the following circumstances:
▪ Before the war, Russia often served as a hub for supplying the much smaller markets currently in question. Foreign trade data based on customs declarations thus pose a methodological problem. Those who previously supplied Armenia through Russia now declare exports to Armenia with Armenia as the destination country as well. This was previously not necessary.
▪ So far, exports have been measured over the entire 2022 annual period without considering the individual listing dates in the embargo. An export that was contractually obligatory for May but was not prohibited until the eighth (October 2022) or tenth (December 2022) sanctions package (this only included certain microelectronics) would thus fall into the statistics gauging potential sanctions circumvention.
Sanction circumvention does take place. We are also convinced of this and expressly recognize the problem. However, there is an urgent need to precisely assess the facts, to narrow them down and to prevent collateral damage by tightening the rules. Quantitative data on qualitative breaches (circumvention) and targets (effectiveness sanctions) are necessarily inaccurate. The gaps in the embargo arise from the fact that too few other states have joined the Russia embargo of the G7+ states and that there are correspondingly many markets for circumvention and successful Russian procurement. All this can only be remedied if, first of all, the state takes itself to task
Imprint
Bundesverband der Deutschen Industrie e.V. (BDI)
Breite Straße 29, 10178 Berlin
www.bdi.eu
T: +49 30 2028-0
Lobbyregisternummer: R000534
EU Transparency Register Identification Number 1771817758-48
Contact
Matthias Krämer
Head of Division
BDI-External Economic Policy
T: +49 30 2028-1562
m.krämer@bdi.eu
Dr. Nikolas Keßels
Deputy Head of Division
BDI-External Economic Policy
T: +49 30 2028-1518
n.kessels@bdi.eu
Andreas Metz
Head of Public Affairs
German Eastern Business Association
T: +49 30 206167-120
a.metz@oa-ev.de
BDI Dokumentennummer: D 1763
