Brussels, 9 April 2024
Speech by Executive Vice-President Dombrovskis at the European Parliament S&D group conference:
Madam Chair, Honourable Members, ladies and gentlemen: thank you for inviting me to this seminar on the EU sanctions regime.
Let me start by reaffirming the EU’s steadfast commitment to supporting Ukraine and its people in the face of Russia’s illegal and brutal war.
Since the start of the Russian aggression, the EU, its Member States and institutions, have provided Ukraine with more than €88 billion in support. This support comes on every level: political, financial, humanitarian and military.
As you know, we are opening negotiations for Ukraine’s EU accession. More than four million Ukrainian refugees have taken temporary protection in EU countries, most of whom are women and children. And for the first time in history, the EU is providing military assistance to a country at war.
Our support should continue for as long as it takes for Ukraine to emerge victorious.
We will keep applying maximum pressure against Russia . It will continue until Russia stops its aggression and until Ukraine has re-established a just and lasting peace on its own soil.
This means doing everything that we can to starve the Kremlin regime’s ability to wage its delusional war, to drain its war machine of revenue sources, key goods and critical technology.
The European Union is achieving this by imposing a series of tough and powerful sanctions, where we are coordinating with the United States and other key allies. The sanctions apply not only to Russia but also to its complicit ally, Belarus.
But are they working? The short answer is ‘yes’. However, it is a ‘qualified yes’.
Sanctions are only effective if they are carried out and enforced properly. And they could be working even more effectively. For a number of reasons, their short-term impact has been less pronounced than expected.
The sanctions are having a clear and material impact on Russia’s economy and foreign revenues. They have ruptured its existing supply chains. They have limited access to western technologies in key industrial sectors.
We also cannot trust all the economic data emerging from Russia, which is incomplete at best.
But it is clear that sanctions have caused an increased cost to the Russian economy. Just for example, it appears that Russia’s current account surplus decreased by 80% in 2023.
For most of last year, the rouble was trading below its pre-war levels. It has now lost more than 40% of its value from its peak in summer 2022, at the height of the energy crisis.
And, as we are all aware, the energy sector is vital to Russia’s state foreign earnings and budget.
Even though 2023 revenues from oil and gas production and exports were 24% down from 2022, it is clear that Russia will keep drawing substantial revenues from its energy exports.
For the Russian war machine, every rouble , euro and dollar counts. This is where we have to mention the large multinationals that continue to do business with Russia.
They are contributing to the Kremlin’s coffers and assisting its brutal and illegal war.
History shows – and I speak as a Latvian with direct familiarity with our large neighbour – that one should not underestimate the threat that Russia poses.
Before the war, Russia had substantial financial buffers: as I indicated, this is largely thanks to its energy exports.
Up to €300 billion of Russian Central Bank assets are frozen worldwide, of which around €207 billion are in EU countries. We also know that it has used half of liquid reserves from the National Wealth Fund.
However, its remaining buffer amounts are helping the Kremlin to continue its war despite western sanctions.
In this context, the European Commission has proposed using the extraordinary profits from these ECB frozen assets to support Ukraine.
The immediate focus would be on financing military support – 90 percent – and the remainder for Ukraine’s recovery and reconstruction. We hope that Member States will adopt this proposal soon – because Ukraine needs this money now.
Discussions are also ongoing at the G7 on how to use the frozen Russian assets. A decision has already been taken at the G7 that assets remain immobilised as long as it pays reparations. Those discussions continue at the G7.
In the meantime, Russia’s economy has become a war economy. It is driven by public and military spending that maintains employment and benefits some elements of the Russian population. But certainly not all of it.
While the oil price cap agreed with our G7 partners has helped to reduce Russia’s energy revenues, Russia is still managing to generate significant revenues for its military complex.
And Putin’s regime is imaginative in devising elaborate schemes and techniques to bypass western sanctions – for example, by adapting trade routes and shipping methods.
This is how it tries to obtain the goods that its military-industrial complex needs, by using opaque routes and networks through non-European countries. I will return to this aspect.
Staying with energy: there is growing evidence to show that Russian oil is being sold above $60 per barrel cap.
In addition, we are well aware of the dark ‘shadow’ fleet of old tankers that Russia uses to transport oil in violation of the price cap, and deceptive practices such as ship-to-ship transfers.
This is why we took a series of measures to make sure that the price cap is better enforced.
For example, listing vessels that help Russia to circumvent the cap was effective in reducing oil revenues in December 2023. First estimates of oil revenues for January 2024 show a further reduction of around 10%.
We have imposed an access ban to EU ports for vessels carrying out illegal ship-to-ship transfers, and for vessels disabling their shipborne automatic identification system as a way to circumvent sanctions.
At the same time, it has to be admitted that in general, Russia has managed to set up new trade routes relatively quickly. It has increased trade with countries that do not impose sanctions – such as China, India, some Middle East countries and some others.
While direct exports to Russia from the EU and other sanctioning countries have declined, some exports of sanctioned goods have reached Russia via certain non-EU countries and via subsidiaries of European companies that operate outside the EU.
They include items and technology which are not weapons but can be used for military purposes.
There are two categories:
First, what are known as common high-priority goods, or ‘battlefield goods’: meaning dual-use goods and advanced technology retrieved on the battlefield in Ukraine in the Russian weaponry.
Second, economically critical goods: industrial items essential for enhancing Russia’s economic and industrial base that supports its military campaign.
In addition to transhipment hubs outside Europe, production hubs – particularly in Asia – have increased their exports of sanctioned goods to Russia. These flows are regularly monitored to identify and follow circumvention patterns.
We must deplore the fact that Russia continues to use components also of EU origin in its war against Ukraine.
Our sanctions prohibit the export of these components and the associated financing by European banks.
However, some European operators continue to export to non-EU countries, which then re-export to Russia.
The EU has equipped itself with various instruments to counter this practice.
For example, we have imposed a legal requirement to include a “no re-export to Russia” clauses in export contracts for certain sensitive goods and the possibility of designating operators from non-EU countries. The Commission is working closely with European banks to remind them of their obligations and to support them in carrying out the EU’s restrictive measures.
We have taken action to criminalise sanctions circumvention, with a directive to make sure that EU sanctions are applied uniformly across our Member States by closing loopholes and removing safe havens for those trying to play our system. Any breaches or circumvention of EU sanctions will be punished in all Member States consistently.
In case it needs to re-emphasised: the effectiveness of sanctions depends on how well they are carried out and enforced. And that means in every EU country. There is no room for complacency here.
Russia will continue to use every means available to find a way around the sanctions.
So we need to continue to address it. Any violations of the oil price cap should also be addressed, and any circumvention via other countries, especially for dual-use goods.
The European Commission constantly evaluates the effectiveness of the measures in place, assessing how they are applied, detecting, and addressing any potential loopholes.
We are working closely with our international partners, particularly in the G7. International coordination on sanctions is vital, especially since different jurisdictions have different ways of adopting and applying restrictive measures.
This is reflected in our determination to further align both our listings and our sectoral restrictions with our partners.
And it has led to agreeing measures such as the oil price cap and the ban on Russian diamonds.
Since Russia launched its full-scale military assault, the EU has imposed 13 packages of sanctions to limit its capacity to wage war. These massive restrictions target high-value sectors of the Russian economy, as well as many individuals and companies – including asset freezes.
They also focus on limiting Russia’s access to military technology and goods that might contribute to the technological enhancement of its defence and security sector.
However, the available space for taking new measures is becoming more limited. We see that discussions among EU Members States are becoming more difficult.
Our focus is shifting to ensuring proper and uniform implementation of the existing sanctions, closing loopholes and fighting circumvention and evasion. The European Commission is constantly monitoring evolutions in trade data.
There are other ways of limiting Russia’s revenues. For example, the Commission has proposed raising punitive tariffs on imports of Russian and Belarussian cereals, oilseeds and derivatives. Our aim is to:
- prevent Russian grain from destabilising the EU market,
- stop Russia from using revenues from these exports,
- and making sure that illegal Russian exports of stolen Ukrainian grain do not enter the EU market.
We hope that EU Member States will adopt this proposal soon.
We have started preparing a 14th sanctions package, which should be adopted in spring. It is likely to include an extensive list of restrictive measures with a strong anti-circumvention angle – in the maritime sector, for example, as Russia continues to try and violate the price cap for its oil exports.
We are also looking how to stop sanctions circumvention via western subsidiaries operating in countries outside Europe. From the EU perspective, EU parent companies that retain influence over the business operations of their overseas subsidiaries can incur responsibility for operations undertaken by those subsidiaries.
To conclude: we will continue to put pressure on Russia and on those who support it on the battlefield, wherever they are. We will continue going after Putin’s cronies. And we will continue to go after those helping Russia to circumvent sanctions or replenish its war arsenal.
Thank you.
Source – EU Commission