The Bureau of Industry and Security (BIS) is seeking comments on a proposed rule that would prohibit transactions involving Vehicle Connectivity System (VCS)[1] hardware and covered software designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction of China (including Hong Kong) or Russia. Comments will be due by October 24.

Under the proposed rule:

  • U.S. persons importing VCS hardware[2] for further manufacturing, integration, resale, or distribution (known as “VCS hardware importers”) may not knowingly import VCS hardware that is designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of China or Russia.
  • Connected vehicle manufacturers[3] may not knowingly import or sell into the U.S. completed connected vehicles that incorporate covered software[4] designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of China or Russia.
  • Connected vehicle manufacturers who are persons owned by, controlled by, or subject to the jurisdiction or direction of China or Russia may not knowingly sell in the U.S. completed connected vehicles that incorporate VCS hardware or covered software.
  • A Declaration of Conformity must be submitted to BIS before importing the following items:
    • VCS hardware that is not otherwise prohibited under the proposed rule; or
    • Completed connected vehicles containing covered software as part of a transaction that is not otherwise prohibited under the proposed rule.
  • A Declaration is also required to sell completed connected vehicles manufactured or assembled in the U.S. that incorporate covered software as part of a transaction that is not otherwise prohibited under the proposed rule.
  • A Declaration must include a hardware or software bill of materials and evidence of the importer or manufacturer’s due diligence efforts (e.g., independent or hired third-party research) to verify compliance.
  • Specific licenses will be available on a case-by-case basis for otherwise prohibited transactions. License applications will be processed within 90 days of submission.

Persons owned by, controlled by, or subject to the jurisdiction or direction of a specific country means:

  • Any person who acts as an agent, representative, or employee, or any person who acts in any other capacity at the order, request, or under the direction or control, of that country or a person whose activities are directly or indirectly supervised, directed, controlled, financed, or subsidized in whole or in majority part by that country.
  • Any person who is a citizen or resident of that country or a country controlled by that country, and is not a U.S. citizen or permanent U.S. resident.
  • Any corporation, partnership, association, or other organization with a principal place of business in, headquartered in, incorporated in, or otherwise organized under the laws of that country or a country controlled by that country.
  • Any corporation, partnership, association, or other organization, wherever organized or doing business, that is owned or controlled by that country, to include circumstances in which any persons identified in the previous three bullets possess the direct or indirect power, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in any entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting the entity.

Persons would not be considered owned by, controlled by, or subject to the jurisdiction or direction of China or Russia solely based on the country of citizenship of natural persons who are employed, contracted, or otherwise similarly engaged to participate in the design, development, manufacture, or supply of VCS hardware or covered software.

If adopted, the proposed rule would take effect 60 days after publication in the Federal Register.

The proposed rule includes the following exemptions to the license and Declaration requirements:

  • For VCS hardware that is not associated with a vehicle model year, importation will be permitted through December 31, 2028.
  • For VCS hardware associated with a vehicle model year before 2030 or imported as part of a connected vehicle with a model year before 2023, importation will be permitted.
  • For completed connected vehicles, importation or sale will be permitted if the VCS hardware or covered software was manufactured before Model Year 2027.

[1] “Vehicle Connectivity System” means a hardware or software item for a completed connected vehicle that has the function of enabling the transmission, receipt, conversion, or processing of radio frequency communications at a frequency over 450 megahertz.

[2] “VCS hardware” means the following software-enabled or programmable components and subcomponents that support the functions of VCSs or are part of an item that supports the function of VCSs: microcontroller, microcomputers or modules, systems on a chip, networking or telematics units, cellular modem/modules, Wi-Fi microcontrollers or modules, Bluetooth microcontrollers or modules, satellite navigation systems, satellite communication systems, other wireless communication microcontrollers or modules, and external antennas. VCS hardware does not include component parts that do not contribute to the communication function of VCS hardware (e.g., brackets, fasteners, plastics, and passive electronics).

[3] “Connected vehicle manufacturers” means U.S. persons (1) manufacturing or assembling completed connected vehicles in the U.S.; or (2) importing completed connected vehicles for sale in the U.S. A “connected vehicle” is a vehicle driven or drawn by mechanical power and manufactured primarily for use on public streets, roads, and highways, that integrates onboard networked hardware with automotive software systems to communicate via dedicated short-range communication, cellular telecommunications connectivity, satellite communication, or other wireless spectrum connectivity with any other network or device. A “completed connected vehicle” is a connected vehicle that requires no further manufacturing operations to perform its intended function.

[4] “Covered software” means software-based components, in which there is a foreign interest,[4] executed by the primary processing unit of the respective systems that are part of an item that supports the function of Vehicle Connectivity Systems or Automated Driving Systems at the vehicle level.  Covered software does not include firmware, which is characterized as software specifically programmed for a hardware device with a primary purpose of controlling, configuring, and communicating with that hardware device. Covered software also does not include open-source software that can be freely used, modified, and distributed by anyone, with both access to the source code and the ability to contribute to the software’s development and improvement unless that open-source software has been modified for proprietary purposes and not redistributed or shared.

Key takeaways

  • In October 2024 the UK government will launch the Office of Trade Sanctions Implementation (OTSI) to bolster the enforcement of UK trade sanctions.
  • On 12 September 2024 the UK government laid before Parliament the Trade, Aircraft and Shipping Sanctions (Civil Enforcement) Regulations 2024 (the Regulations). They were accompanied by new statutory guidance – see here and here.
  • The Regulations outlines OTSI’s civil enforcement powers, including the power to impose monetary penalties for breaches of aircraft, shipping and trade sanctions.
  • This is a significant development in the UK’s sanctions framework, particularly for those subject to the Regulations’ new reporting requirements.

Evolution of UK sanctions regime

The enforcement and management of UK trade sanctions has historically been overseen by two bodies within the Department for Business and Trade: the Export Control Joint Unit (ECJU) and the Import Licensing Branch (ILB). The ECJU’s primary responsibility is the administration of export licensing, and the ILB’s, import licensing for certain industrial goods subject to import sanctions.

Separately, His Majesty’s Treasury operates the Office of Financial Sanctions Implementation (OFSI), responsible for the implementation and enforcement of financial sanctions in the UK.

The creation of OTSI is aimed at bolstering the enforcement of aircraft, shipping and trade sanctions, against the backdrop of the UK’s extensive sanctions introduced against Russia. This is consistent with the UK government’s foreign policy focus on broadening and tightening its Russian sanctions regime.

OTSI’s enforcement powers

The Regulations introduce new civil enforcement powers to support the enforcement of aircraft, shipping and certain trade sanctions. Relevant trade sanctions include the export, supply, delivery, making available, transfer or acquisition of restricted goods, as well as related ancillary services (e.g. financial assistance and brokering).

Notably, a carve-out has been included to the effect that OFSI remains responsible for the enforcement of Russian Oil Price Cap restrictions.

OTSI’s powers include the power to:

  • Impose monetary penalties for violations, with a maximum penalty up to the greater of £1 million or 50% of the estimated value of the breach (or in the case of aircraft and shipping sanctions, 50% of the estimated value of the aircraft or ship)
  • Make information requests
  • Issue warning letters and publish reports on sanctions breaches

Consistent with UK financial sanctions, civil penalties for breaches or failures to comply with trade sanctions will be assessed on a ‘strict liability’ basis. Further, liability for failure to comply may extend to corporate officers, such as directors or managers, if a breach is committed with their consent, connivance or neglect.

Reporting requirements

The new regime also imposes reporting obligations in relation to suspected breaches. Failure to comply with reporting obligations (or information requests) is a criminal offence, punishable by a fine and/or imprisonment not exceeding six months.

Ongoing reporting obligations apply to ‘relevant persons’, the definition of which varies, depending on the underlying restriction:

For the purposes of the trade sanctions, it includes:

  • Any person that has permission under Part 4A of the Financial Services and Markets Act 2000 to carry on one or more regulated activities (permission to carry on a regulated activity)
  • Legal and notarial services providers, although reporting obligations and requests for information do not apply to privileged information
  • Any business that operates a currency exchange office, transmits money or cashes cheques that are payable to customers

This replicates (in part) the categories of persons subject to reporting requirements in relation to asset-freeze restrictions.

With respect to aircraft and shipping sanctions, it includes:

  • Aircraft: airport operators, aircraft operators, pilots in command or any person that charters an aircraft for business
  • Shipping: harbour authorities, masters or pilots, or any person that charters a ship for business

Mitigating factors

In instances of a suspected breach, voluntary disclosure is encouraged, which may be considered as a mitigating factor when evaluating a case, including the decision whether to impose a monetary penalty or reduce the penalty.

Other mitigating factors stated in the guidance include:

  • Compliance with requests for information that OTSI may send out to reporters of suspected breaches during its investigations
  • Compliance with any relevant recordkeeping obligations under sanctions regulations
  • No record of previously having breached sanctions legislation
  • Good knowledge of trade sanctions and relevant compliance systems proportionate to the size, exposure to sanctions and resources of the business

Conclusion

These developments align with the UK’s broader sanctions strategy, intensifying pressure on companies to ensure comprehensive compliance. Companies engaged in trade or shipping activities are encouraged to strengthen internal compliance frameworks to manage the heightened enforcement risk. This includes monitoring trade routes, aircraft and shipping operations closely to avoid inadvertent violations of UK sanctions. In particular, parties falling within the newly established reporting requirements should put in place internal procedures to ensure compliance with these new measures.


A UK Court of Appeal decision in June 2024 has heightened the UK’s focus on the potential for money laundering offences within global supply chains. There is now a greater risk that UK law enforcement may recover assets from companies that fail to perform adequate due diligence on their supply chain, even if adequate consideration was paid for goods.

This increased risk also means that businesses could face prosecution for criminality within their supply chain and associated money laundering offences, which could have significant repercussions for many companies, particularly those in the clothing and retail sectors.
It is crucial for businesses to assess their existing compliance procedures to ensure they are not inadvertently committing money laundering offences.

Our lawyers offer insights on how companies can mitigate these risks in their latest alert.

On Tuesday 23rd July, energy and natural resources partners Sachin Kerur and James Willn, along with international trade partner Leigh Hansson, hosted the highly anticipated webinar “Sanction Strategies: Focus on India, China, and the Middle East.” During this insightful session, the team delved into the latest sanctions decisions, explored the implications for companies in these regions and discussed the future direction of sanctions activity.

To access the webinar recording and the slides used during the session, please click this link.

On July 10, BIS released new guidance strongly encouraging companies involved in exporting, reexporting, or transferring (in-country) Common High Priority List (CHPL) items to screen transaction parties against the list maintained by the Trade Integrity Project (TIP) (in addition to the Consolidated Screening List).

TIP is an initiative of the UK-based Open-Source Centre that monitors military and dual-use trade with Russia. The TIP website displays entities that have shipped CHPL items to Russia since 2023, according to publicly available trade data.

The guidance also outlines the different actions that BIS takes to inform industry and academia about parties—beyond those identified on public screening lists like the Entity List—that present diversion risks.

Back to a new normal?

As of 30 June 2024, the EU’s Temporary Crisis and Transition Framework for state aid measures, which was introduced following the Russian invasion of Ukraine, has expired in relation to state aid measures applicable to most sectors. Measures relating to the primary agriculture, fishery, and aquaculture sectors remain covered by the Framework until 31 December 2024. We will explore the potential consequences of this in more detail below.

Background

The full-scale invasion of Ukraine by Russia on 24 February 2022 led to the imposition of several packages of sanctions by the European Union. The most recent one, the 13th to date, was passed by the European Council on the two-year anniversary of the war – 23 February 2024.

In response to these, Russia introduced counter-sanction measures, and notably made the decision to cut off gas supplies to a number of EU Member States, such as Bulgaria and Poland. The impact on these countries, as well as on the internal market generally, was significant. Companies had to cope with the resulting spike in energy prices. In this context, on 23 March 2022, the European Commission adopted the Temporary Crisis Framework (the “Framework”) to enable Member States to support their economies by way of state aid measures.

The principle: state aid is prohibited

Under EU law, the general principle contained in Article 107 TFEU is that state aid measures are prohibited, as they are contrary to the continuing integration of the internal market. State aid can however be justified, if it is needed to ‘remedy a serious disturbance in the economy of a Member State’ (Article 107(3)(b)). The Framework explicitly states that state aid granted ‘to remedy the liquidity shortage faced by undertakings that are directly or indirectly affected by the serious disturbance of the economy caused by the Russian military aggression against Ukraine, the sanctions imposed by the EU or by its international partners, as well as the economic counter measures taken’ may be permissible.

It should be noted that this is not the first temporary framework set up by the European Union in response to global events. A similar framework to weather the COVID-19 storm was set up in 2020, and expired on 30 June 2022. Under both frameworks, the approach taken by the EU is not a blanket approval of state aid granted to companies: measures are subject to conditions to be considered permissible. For example, the Framework specifies that any undertaking may not benefit from total aid exceeding EUR 400 000 at any given point in time. It also requires for the undertaking to actually be “affected by the crisis”. Special rules also apply to the primary agriculture, the fishery and aquaculture sectors. Despite recognising the Russo-Ukrainian war and its economic consequences as an exceptional circumstance, the EU therefore presented itself as remaining cautious when considering state aid.

Commission decisional practice

It is nonetheless interesting to note that the Commission has not made any decisions to initiate formal investigation procedures into any state aid measure granted after 23 March 2022 and justified on the basis of the Framework. While such decisions are not the norm in any context, this remains remarkable: in the same period, the Commission initiated an investigation into 17 other measures justified on other pieces of legislation (such as, for example, on the basis of the Agricultural Guidelines). This suggests a certain leniency when considering cases justified on the basis of the Framework: whether an undertaking is “affected by the crisis” can namely be interpreted quite widely.

In a decision dated 13 November 2023, the Commission for example considered that a financial aid measure granted by the Polish state to raspberry producers, in light of increased competition from Ukrainian raspberries, was justifiable on the basis of the Framework. While higher energy prices were cited, other, more indirect factors, were also cited by the Commission in its analysis. It for example considered the difficulties of keeping the fruit frozen due to power outages in Ukraine, and the impact this had on the market in Poland. This evidences the Commission’s wide approach to what may be considered a consequence of the crisis.

Looking to the future

The Framework was first extended in October 2022. It was then amended in March 2023, and rebranded as the Temporary Crisis and Transition Framework. In line with the EU Green Deal, this amended Framework aims to also cater to measures which have as their objective to foster the transition to a net-zero economy. The expiry date for the Framework was also set at 30 June 2024, with some exceptions in relation to specific sectors, as previously mentioned.

The Framework coming to an end could be seen as surprising: when the COVID Framework came to an end in June 2022, the height of the pandemic had passed in most EU Member States. The Ukraine war is however currently still a ‘hot’ conflict, as shown notably by the May 2024 Kharkiv offensive. A 14th package of sanctions was introduced by the EU on 24 June 2024, included a ban on reloading services relating to Russian LNG in the EU for the purpose of transshipment operations to non-EU countries, the purchase, import or transfer Russian LNG through LNG terminals in the Union that are not connected to the interconnected natural gas system, as well as restrictive measures against Russian LNG projects. More about this can be read in the Reed Smith client alerts here and here.  This comes against the backdrop of recent sanctions enforcement by the wider G7 coalition targeting Russian LNG projects: many of the factors explaining the introduction of the Framework therefore appear to remain current.

However, wider economic and political circumstances could be the explanation. Most notably, the EU’s dependence on Russian gas has fallen from 45% in 2021 to only 15% in 2023, allowing for energy prices to somewhat stabilize. Simultaneously, a number of Member States who were initially very committed to supporting Ukraine in its defense efforts are showing signs of lassitude: for example, in a much-publicized move in April 2023, Poland banned imports of Ukrainian wheat and corn. More recently, on 14 May 2024, the EU adopted regulations imposing caps on duty-free imports for some Ukrainian produce, including eggs, poultry, and certain types of grains.

As the impact of the conflict on EU markets somewhat stabilizes, the end of the Framework and the progressive return to regular state aid rules therefore appears to mark the return to a new normal. The end of the Framework could however entail a shift away from the Commission’s permissive attitude, and undertakings receiving state aid should be aware of the risks associated with this. In tandem with the ongoing imposition of sanctions and counter-sanctions, the regulatory landscape therefore presents complexities: as the Russia-Ukraine conflict evolves, the situation could also be subject to rapid changes. Undertakings affected by the fall out of the war should seek appropriate advice in order to navigate these issues, and to ensure regulatory changes are anticipated promptly.

On 24 June 2024, the European Union (EU) agreed the long-awaited 14th package of sanctions against Russia. These latest measures introduce several new thematic restrictions and are introduced off the back of several new UK and U.S. restrictions imposed over the course of the past few weeks.

The latest measures are contained in (A) Council Regulation 2024/1746 which amends Council Regulation (EU) No 269/2014; and (B) Council Regulation (EU) 2024/1745 which amends Council Regulation (EU) No 833/2014.

Asset Freeze Restrictions

The EU has imposed asset freeze measures on an additional 116 individuals and entities. These can be found here. Of note in the transportation industry are Sovcomflot and the Volga Dnepr Group.

Continue Reading EU 14th Sanctions Package against Russia

On June 12, the Office of Foreign Assets Control (OFAC) and Bureau of Industry and Security (BIS) released new sanctions and export controls intended to further target Russia and Belarus, as well as those who transact with sanctioned entities and create diversion risks for export-controlled items.

New restrictions on certain IT and software services, effective September 12

In addition to sanctioning over 300 individuals and entities, OFAC issued a determination that prohibits the export, reexport, sale, or supply, directly or indirectly, of the following services by a U.S. person or from the United States to any person in Russia:

  • IT consultancy services[1]
  • IT design and development services for applications[2]
  • IT support services[3] for enterprise management or design and manufacturing software (collectively, “Covered Software”)
  • Cloud-based services[4] for Covered Software

“Enterprise management software” includes:

  • Enterprise resource planning (ERP) software
  • Customer relationship management (CRM) software
  • Business intelligence (BI) software
  • Supply chain management (SCM) software
  • Enterprise data warehouse (EDW) software
  • Computerized maintenance management system (CMMS) software
  • Project management software
  • Product lifecycle management (PLM) software

“Design and manufacturing software” includes building information modelling (BIM), computer aided design (CAD), computer-aided manufacturing (CAM), and engineer to order (ETO) software.

The determination does not affect services:

  • To an entity in Russia that is directly or indirectly owned or controlled by a U.S. person
  • In connection with the wind down or divestment of an entity located in Russia that is not directly or indirectly owned or controlled by a Russian person
  • For software subject to the Export Administration Regulations (EAR) that is authorized by the Bureau of Industry and Security (BIS) for export, reexport, or transfer (in-country) to or within Russia
  • For software that is not subject to the EAR but would be eligible for a license exception or otherwise authorized for export, reexport, or transfer (in-country) to or within Russia by BIS if it was subject to the EAR

Expanded definition of Russia’s “military-industrial base” under Executive Order 14114

OFAC expanded the definition of Russia’s military-industrial base to include all persons sanctioned under Executive Order 14024. Consequently, foreign financial institutions that conduct or facilitate significant transactions with any person sanctioned under Executive Order 14024, including VTB Bank and Sberbank, now have a secondary sanctions risk.

OFAC concurrently published a Compliance Advisory for foreign financial institutions.

Russia-related amendments to the EAR

On June 18, BIS will publish a final rule in the Federal Register amending the EAR to:

  • Require a license (subject to certain exceptions) to export, reexport, or transfer (in-country) Covered Software subject to the EAR and classified as EAR99 to or within Russia or Belarus. The license requirement includes software updates and will go into effect 90 days after the notice is published. Exports, reexports, and transfers (in-country) to wholly owned U.S. subsidiaries or subsidiaries of companies headquartered in Country Group A:5 or A:6 will not require a license.
  • Consolidate the Russia and Belarus-related controls into one section (15 C.F.R. § 746.8).
  • Add 522 additional Harmonized Tariff Schedule (HTS)-6 codes to Supplement No. 4 to Part 746. These products will require a license to export, reexport, or transfer (in-country) to or within Russia or Belarus.
  • Add new controls on certain riot control agents.
  • Narrow the scope of the items eligible for export, reexport, or transfer (in-country) to or within Russia or Belarus under License Exception CCD (Consumer Communications Devices).

New address-only Entity List entries that apply to all entities using that address

BIS’s final rule will add a new provision to the EAR (15 C.F.R. § 744.16(f)) allowing BIS to identify addresses on the Entity List that present a high risk of diversion. These addresses can be added without a specific entity name and will be labelled “Address #.” (e.g., Address 1, Address 2).

Each entry will identify the specific license requirements, review policies, and license exception restrictions that apply to that address. The restrictions associated with that address will apply to any entity using that address (unless the entity has its own Entity List entry, in which case the more restrictive entry will control).

If an Entity List entry has a named entity and an address, a party to a transaction that uses that same address will still only be considered a potential “red flag.” The exporter, reexporter, or transferor should then undertake sufficient due diligence to verify the party to the transaction is not the, in fact, the Entity List entity or acting on behalf of the Entity List entity.

[1] “IT consultancy services” include “providing advice or expert opinion on technical matters related to the use of information technology, such as: (a) advice on matters such as hardware and software requirements and procurement; (b) systems integration; (c) systems security; and (d) provision of expert testimony on IT related issues.” U.S. Dept’ of the Treasury, Off. of Foreign Assets Control, FAQ 1187 (June 12, 2024), https://ofac.treasury.gov/faqs/1187.

[2] “IT design and development services for applications” include “services of designing the structure and/or writing the computer code necessary to create and/or implement a software application, such as: (a) designing the structure of a web page and/or writing the computer code necessary to create and implement a web page; (b) designing the structure and content of a database and/or writing the computer code necessary to create and implement a database; (c) designing the structure and writing the computer code necessary to design and develop a custom software application; (d) customization and integration, adapting (modifying, configuring, etc.) and installing an existing application so that it is functional within the clients’ information system environment.” Id.

[3] “IT support services” include providing technical expertise to solve (1) “problems for the client in using software, hardware, or an entire computer system, such as: (a) providing customer support in using or troubleshooting the software; (b) upgrading services and the provision of patches and updates; (c) providing customer support in using or troubleshooting the computer hardware, including testing and cleaning on a routine basis and repair of IT  equipment; (d) technical assistance in moving a client’s computer system to a new location; (e) providing customer support in using or troubleshooting the computer hardware and software in combination”; and (2) “specialized problems for the client in using a computer system, such as:  (a) auditing or assessing computer operations without providing advice or other follow-up action including auditing, assessing and documenting a server, network or process for components, capabilities, performance, or security; (b) data recovery services, i.e. retrieving a client’s data from a damaged or unstable hard drive or other storage medium, or providing standby computer equipment and duplicate software in a separate location to enable a client to relocate regular staff to resume and maintain routine computerized operations in event of a disaster such as a fire or flood; and (c) other IT technical support services not elsewhere classified.” Id.

[4] “Cloud-based services” include “the delivery of software via the internet or over the cloud, including through Software-as-a-Service (SaaS), or SaaS cloud services in relation to such software.” Id.

On 14 September 2022, as part of a suite of regulatory changes targeting cross-border supply chains, the European Commission presented its proposal for a Forced Labour Regulation.

In November 2023, the European Parliament adopted its position on the Commission’s proposal, followed by the Council of the EU adopting its General Approach in January 2024. After intensive inter-institutional negotiations, EU co-legislators (the Council of the EU and the European Parliament) reached a provisional agreement on the text of the Forced Labour Regulation on 5 March 2024. On 23 April 2024, it was adopted by the Parliament and will be formally endorsed by the Council in the coming weeks.

The Forced Labour Regulation prohibits the sale or export of products made with forced labour, including child labour, within the EU. Our lawyers delve into the details of this new regulation and its link with the Corporate Sustainability Due Diligence Directive in their latest client alert.

Background

Russia’s military action against Ukraine has had a profound impact on Ukraine’s ability to trade with the rest of the world. Under such exceptional circumstances and to mitigate the negative economic impact of Russia’s aggression on Ukraine, the EU decided in May 2023 to grant sweeping concessions to Ukraine in the form of trade-liberalisation measures for all products. One year on, those concessions have had a significant impact on EU farmers themselves, who have been asking for better protection from Ukrainian imports.  The EU just agreed to continue the existing trade liberalisation, but with the inclusion of new safeguard mechanisms, and in parallel to increase tariffs on imports of grain from Belarus and Russia, to release the pressure on EU farmers at expense of both countries, and not the Ukraine.

  1. The existing measures and their consequences on EU farmers

On 31 May 2023 the EU adopted Regulation (EU) 2023/1077, which suspended for one year:

  • The application of the entry price system to fruit and vegetables;
  • Tariff quotas and import duties;
  • Existing anti-dumping duties; and
  • The creation of certain safeguard measures.

As a result, EU farmers have been facing growing competition from imports of grains from Ukraine.  EU farmers also face significant competition from Russian and Belarusian grain.

The EU has been working for months on measures that take into account to interest of EU farmers, while maintaining its support for Ukraine’s farmers. 

In February and March 2024, the European Commission proposed two new measures: a regulation extending the above-mentioned suspensions for another year and a regulation increasing tariffs on imports into the EU of grain products (cereals, oilseeds, and derived products) from Russia and Belarus. Both measures have been endorsed by the Council of the European Union and will enter into force on 6 June 2024 and 1 July 2024, respectively.

  1. Extension of trade-liberalisation measures for Ukrainian imports

On 14 May 2024, the Council of the EU and the European Parliament adopted Regulation 2024/1392 extending the temporary trade-liberalisation measures (the ‘renewal Regulation’).  It will enter into force on 6 June 2024

To counter the potential negative effect of the measures on EU farmers, the renewal Regulation incorporates several changes compared to Regulation (EU) 2023/1077, including the following safeguard mechanisms:

  • If a product originating from Ukraine that is covered by the trade-liberalisation measures is imported under conditions which adversely affect the Union market or the market of one or several member states for like or directly competing products, the Commission may now impose any necessary measures by means of an implementing act. Such measures may only be imposed upon a duly substantiated request from a member state.
  • Automatic safeguard mechanism which obliges the Commission to reintroduce tariff-rate quotas if the cumulative import volume of either eggs, poultry, sugar, oats, maize, groats, or honey exceeds the arithmetic mean of import volumes recorded in the second half of 2021, all of 2022 and all of 2023.
    • The automatic safeguard measure under Regulation (EU) 2023/1077 only covered eggs, sugar, and poultry. The renewal Regulation extends this measure to oats, maize, groats, and honey, offering better coverage for EU farmers. The renewal Regulation also shortens the delay for the Commission to act from 21 days to 14 days.
    • In addition – and this has been the object of much debate – the renewal Regulation extends the reference period to determine if imports have exceeded the arithmetic threshold to include the second half of 2021. Under Regulation (EU) 2023/1077, the threshold was assessed only for all of 2022 and 2023.

The renewal Regulation excludes from its scope the exemption for anti-dumping duties. As a result, all anti-dumping dumping duties will apply again on 6 June 2024.

  1. Increased tariffs on Russian and Belarusian grain products

In parallel, on 22 March 2024, the Commission proposed to increase the tariffs on imports into the EU of grain products (cereals, oilseeds, and derived products), as well as beet-pulp pellets and dried peas, from Russia and Belarus. The products concerned are classified under Chapters 7, 10, 12, 14, 15 and 23 of the Combined Nomenclature (CN) and are not currently subject to sanctions. This proposal was endorsed by the Council on 30 May 2024 and will enter into force on 1 July 2024.

This Regulation aims to:

  • Prevent EU market destabilisation by mitigating the growing risk to EU farmers.
  • Tackle Russian exports of illegally appropriated grain produced in the territories of Ukraine.
  • Prevent Russia from using revenues from exports to the EU – of both Russian and illegally appropriated Ukrainian grain products – to fund its war against Ukraine.

Depending on the product concerned, the tariffs will increase either to a fixed duty of €95 per tonne or to an ad valorem duty of 50%. Lastly, the EU’s WTO quotas on grain, which offer better tariff treatment for some products, will no longer be applicable to Russia and Belarus.

Looking ahead

  1. Next steps for the Regulation concerning Ukrainian grain imports

The renewal Regulation will enter into force on 6 June 2024 and will remain applicable until 5 June 2025.

  1. Next steps for the Regulation concerning Russian and Belarusian grain imports

The Regulation has been published in the EU’s Official Journal and will enter into force on 1 July 2024, meaning the increased tariffs will be imposed from that date.