European Commission to present new regulation to strengthen control over sensitive sectors

The European Union is exploring options to maintain pressure on Putin’s regime as the two-year mark of its war against Ukraine approaches, and a €50 billion financial aid package to Kyiv remains uncertain.

The EU plans to intensify its clampdown on Russia’s sanctions circumvention, including in its upcoming round of penalties set to be released by Feb. 24, the invasion anniversary, as it has already sanctioned most major Russian targets.

On January 24, the European Commission will present a plan with regulations that would strengthen the authority to monitor and, if necessary, prohibit foreign investment in sensitive sectors. A draft regulation, viewed and reported by Bloomberg and Euractiv, reveals that the European Commission will propose new rules next week.

EU’s security risks posed by foreign direct investments

These rules would mandate EU member states to assess the potential security risks posed by foreign direct investments (FDIs) into the EU’s sensitive industries.

One of five new parts of the European Union’s new economic security package, the proposed rule is an effort by the group to strengthen its economic stability. Included in this larger EU strategy to protect vital technologies from bad actors are semiconductors, AI, quantum computing, and biotech.

The plan from the EU executive seeks to create a unified system across the European Union by outlining basic, essential standards that all member states must adhere to.

The present laws of the union do strengthen cooperation among all member states; however, the wording makes the regulation’s real implementation conditional and ultimately up to the national governments. At this time, there is no mandate for EU member states to implement such a system if none exists.

European Commission to expand control over foreign investments

The proposed amendment states that the European Commission will expand the current regulations to cover investments by companies controlled by foreign entities, whether directly or indirectly, and that these investments could affect public order and security. It also requests that member states implement screening mechanisms.

All member states of the European Union must perform due diligence on all investments, regardless of their origin from outside the EU or being made by EU subsidiaries of companies based outside the EU. 

The draft proposal indicates that the European Commission’s goal is to improve the ways in which member states share information and how nations notify each other of investments that are important to the issue.

Member states of the European Union can initiate “Own Initiative Procedures” (OIP) in the updated regulatory draft if they believe that foreign direct investment (FDI) planned in another EU country would compromise their national security or public order.

So, for example, if one EU member state approves a certain FDI, another could still review it thanks to EU cooperation.

After the FDI concluded, EU member states could start these procedures, but they would have a deadline of 15 months.

Better cooperation between EU member states

The EU executive can initiate such a procedure when it obtains information on a foreign direct investment or determines that an undisclosed FDI could impact EU programs, the security and public order in multiple member states, or both.

This would be a huge improvement over the present rule, which only allowed the Commission and other EU member states to communicate with the country receiving foreign direct investment.

More frequent and comprehensive reporting of foreign direct investment (FDI) targeting by EU entities across numerous member states is another goal of the proposed legislation.

Sensitive sectors identified

Under the new regulations, the list of investments considered sensitive would include transportation, energy, and communication networks, as well as other security-related technologies, materials, and research programs.

Chinese involvement in specific industries is expected to significantly impact electric cars (EVs), solar and wind power, and semiconductor investments from outside the EU. Many people associate those with worries about Chinese involvement in specific industries.

The main goal of the EU’s innovations is to prevent modern dual-use technologies from falling into the hands of Russian companies involved in arms production.

Targeting Russia’s sanctions evasion schemes

After all, numerous journalistic investigations have shown that Russia has found ways to continue buying Western electronics, including microchips, to produce missiles and drones that Putin’s forces use to attack Ukrainian cities.

The only way to stop Putin’s war machine is to completely cut off the supply of parts used to make weapons. The supply chain often involves several intermediaries in third countries, making it difficult to trace the final buyer.

More corporate responsibility over dual-use technologies’ exports

Now, European manufacturers of electronics and other dual-use goods will have greater corporate responsibility and will have to know who their products end up with.

The ultimate goal of the measures is to stop Putin’s war against Ukraine, which has been going on for almost two years and has left many Ukrainian cities in ruins and claimed the lives of hundreds of thousands of people.

The EU and US assistance to Ukraine with weapons has helped to hold off the Russian offensive and prevent the seizure of new territories. However, Ukraine has not yet been able to liberate the occupied territories, and the front line has not changed significantly over the past year despite constant heavy fighting.