LawFlash

Update: Extensive Sanctions on Russia Focus on Luxury Goods

April 11, 2022

The European Union, United Kingdom, and United States have introduced a number of extensive sanctions against Russia in relation to the delivery, sale, transit, and export of luxury goods, with the intention of focusing on items that will impact Russian oligarchs and other members of the Russian elite.

UK Sanctions

On March 15, 2022, the UK government announced a ban on the export of high-end luxury goods to Russia, following similar moves by its G7 allies.

The UK Department for International Trade noted that the export ban on luxury goods, which will include high-end fashion goods, vehicles, and works of art, will come into force “shortly.” Legislative details of the proposed ban and additional tariff treatments on Russian imports have not yet been announced.

The United Kingdom has also denied Russia and Belarus access to the “most favored nation” tariff treatment of key Russian imports valued around £900 million (approximately $1.2 billion), in addition to applying further import tariffs that represent a 35 percentage point hike on current rates. These tariffs apply to a wide range of products including vodka, works of art, antiques, fur skins and artificial fur, fertilizers, steel, and aluminum.

EU Sanctions

On March 11, 2022, the European Commission announced a ban on the export of EU luxury goods to Russia. The ban took effect on March 15 pursuant to EU Regulation 2022/428 amending Regulation (EU) No. 833/2014 (together, the Regulations).

Under Article 3(h) of the Regulations, it is prohibited to sell, supply, transfer, or export, directly or indirectly, luxury goods to any natural or legal person, entity, or body in Russia or for sale in Russia. The ban covers a large range of luxury goods, including high-end luxury products such as clothes, watches, accessories, and products for domestic use. The full list of all luxury goods is listed in Annex XVIII of the Regulations. The minimum threshold is €300 (approximately $390).

The ban does not extend to goods that are necessary for the official purposes of diplomatic or consular missions of EU member states or partner countries in Russia or of international organizations enjoying immunities in accordance with international law. The ban will be implemented by EU customs authorities. Under the latest Regulation, there is a prohibition on circumventing these restrictive measures via third countries.

For the purposes of the measures set out in the Regulations, “partner countries” are countries that are applying a set of export restriction measures equivalent to those set out in the Regulations. The list of partner countries is annexed to the Regulations and is regularly under review by the European Commission. As of February 26, 2022, the United States is the only country listed in the annex.

US Sanctions

On March 11, 2022, US President Joseph Biden issued Executive Order 14068 (the EO), which restricts, unless permitted under a general license, exports of luxury goods to Russia and Belarus. The EO also prohibits US imports of Russian alcohol, seafood, and nonindustrial diamonds.

The export restrictions apply to US-origin luxury goods and all goods listed under the final rules released by the US Department of Commerce in the March 16 edition of the Federal Register (the Final Rules), which are subject to the Export Administration Regulations. These include products that are (1) of US origin; (2) located in the United States; (3) produced outside the United States with more than 25% by value of US-controlled content; and (4) produced outside the United States and covered by the special “foreign direct product rules for Russia.”

The export ban extends to the exportation, reexportation, sale, or supply of covered luxury goods to Russia, Belarus, and designated parties, located in Russia or otherwise. In addition, the separate US restrictions on prohibition of finance restrict the provision of extended payment terms.

The Final Rules define “luxury goods” to include, without limitation, essential oils and resinoids; perfumery, cosmetic, or toilet preparations; leather, silk, fabrics and textiles; clocks and watches; and apparel, shoes, and accessories.

The EO restrictions became effective immediately but included a limited savings clause, which allowed exports that were en route aboard a carrier to a port of export, reexport, or in-country transfer on March 11, 2022, to proceed to their destination.

Additionally, on April 7, 2022, the US Department of the Treasury’s Office of Foreign Assets Control placed Alrosa, a Russian state-owned enterprise and the world’s largest diamond mining company, on the Specially Designated Nationals (SDN) list.

Designation on the SDN list subjects Alrosa to an asset freeze, and US persons are generally prohibited from dealing with the company. In addition, Alrosa is also subject to the prohibitions set out under Directive 3 of Executive Order 14024, which restricts Alrosa’s ability to enter into new debt and equity transactions in the United States. This designation of Alrosa as an SDN is separate to the sectoral sanctions on luxury goods.

There are currently two general licenses in place, General License No. 21A and General License No. 24, which are effective until June 7, 2022 and May 7, 2022, respectively, and which both authorize certain transactions that are incident and necessary to the wind-down of Alrosa USA Inc., Public Joint Stock Company Alrosa, and each of their subsidiaries (which are 50% directly or indirectly owned).

Implications for Retailers in the Luxury Goods Industry

The UK, EU, and US export bans will undoubtedly have a number of implications for retailers of luxury goods. Last year, UK companies in total sold £2.6 billion (approximately $3.4 billion) worth of goods to Russia, with automobiles making up the largest segment of these goods at around £400 million (approximately $521 million).

Retailers of luxury goods will no longer be able to sell, export, reexport, or deliver to Russia or to any sanctioned persons, whether or not they are located in Russia. This will affect retailers in the United Kingdom as well as those UK-based retailers with subsidiaries or group companies in the European Union or United States that are subject to those EU and US restrictions. Retailers will need to conduct sanctions screenings and reassess their internal operations to ensure compliance with the sanctions in their supply chains.

Although the details of the UK export ban are still not final, the UK Department for International Trade has expanded its Export Support Service to act as a single point of enquiry for businesses and traders with questions about trading with Ukraine and Russia.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Ukraine Conflict Task Force
Giovanna M. Cinelli
Alexey Chertov
Joanna Christoforou
Bruce Johnston
Grigory Marinichev
Michael Masling
Kenneth J. Nunnenkamp
Georgia M. Quenby
Christina Renner
Melanie Ryan
Vasilisa Strizh
Victoria Thompson
Carl A. Valenstein
Heather Sears
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Nicola Kelly
Christian Kozlowski
Pauline Mutuc
Daniel Lopez Rus
Charles C. Rush
Eli Rymland-Kelly