Armenia: on new silk road for goods to sanctions-hit Russia

Financial Times has published an article, stating that thousands of used cars are brought through the Caucasus into Russia to circumvent US and EU bans. Caliber.Az reprints this article.

Rows of cars stretched in every direction from a customs office building on the outskirts of Gyumri, Armenia’s second city. Many were missing a bumper; some had squashed fenders or doors taped up with plastic bags.

Young Russian men roamed between the vehicles. For them, this corner of the Caucasus has become a key stop on a booming trade route: bringing used cars to Russia, where sanctions over Moscow’s full-scale invasion of Ukraine have left western-brand cars hard to find.

“None of what you see here stays in Armenia,” said one, pointing to the sea of vehicles baking in the heat. “It all gets re-exported to Russia, some to Kazakhstan.”

Armenia is not a car producer, but exports of cars from the tiny country to Russia have soared since last year’s invasion of Ukraine — from $800,000 worth of vehicles in January 2022 to just over $180mn worth of vehicles in the same month this year.

“In Russia, all the auto dealerships have closed, BMW, Audi, everything,” said the young trader. Like other Russians working at the Gyumri customs terminal, he declined to share his name.

“Any wealthy person who would have previously gone to a dealership and bought a car, they can’t do that any more,” he added. “So they turn to us, or to someone else, and get the car brought in.”

Nearby, a car hauler was being filled with bruised and dented Fords. Along the edge of the customs lot, brokers advertised their services on storefront billboards: “Purchase of vehicles on US auctions”; “Transfer in closed container to Gyumri”; “Re-export to Russia”.

Cars are the starkest example, but exports of other goods from Armenia to Russia have also surged, leading to an almost two-fold increase in trade between the two countries in 2022.

Russian consumers have turned to third countries to search for what they are missing as a consequence of western sanctions and corporate departures, placing countries such as Armenia, Türkiye and Kazakhstan at the heart of a busy new trade route for consumer goods.

For Armenia, this has contributed to a massive boom, with its gross domestic product growing a record 13 per cent in 2022, more than double the previous year’s rate.

But it has also left western capitals frustrated. US officials in March listed Armenia among states used “to smuggle prohibited goods” to Russia. The EU’s latest sanctions package focused on preventing third-country circumvention also lists entities in Armenia among the culprits.

The Armenian government strongly denies the accusation. Reports of sanctions circumvention “are nothing more than rumours,” Prime Minister Nikol Pashinyan said in March. “The reality is just the opposite.”

The “leadership of Armenia has clearly publicly voiced its commitment to restrict trade in all risky items”, its foreign ministry said, adding that it was working closely with the US and EU and had put together a list of items that could be used by the Russian military, which are now under especially strict control.

For Russians, foreign cars are a prized target after the US prohibited all light-vehicle exports to Russia, used or new. The EU also swiftly banned exports of vehicles valued above €50,000 and recently expanded this to include all larger cars with an engine size of about two litres or more.

Many foreign car companies have sold off their production plants and shut dealerships inside Russia. Some have also pulled out of the market even though they are not subject to direct export controls. South Korea’s Hyundai has suspended operations and plans to sell its Russian factories.

Chinese models are available but unpopular. Domestic models are few, and their production has been massively depressed by sanctions cutting carmakers off from high-tech production tools. Prices on the second-hand market have shot up.

Cars arrive primarily from the US via the Black Sea port of Poti in Georgia, brokers and buyers said. Many are then brought to Armenia for customs clearance, as the country shares a customs-free trade bloc with Russia.

The city of Gyumri is a key hub from where the vehicles head north to Russia by road, crossing through Georgia again.

“This scheme, US-Georgia-Armenia-Georgia-Russia, is not the only one. There are so many,” said Pavel, a new trader passing through Gyumri from St Petersburg who declined to give his real name. “These schemes have spread like the roots of a tree.”

Sitting at an open-air café filled with the smell of petrol and grilled meat, Pavel said he had considered heading to Belarus — the entry point for cars from Germany — but settled on the Caucasus route. The trader in his 20s, who first tried his hand in Russia as a property broker, said he wanted to get into the car import business himself, and this was his test run.

Pavel first spent months researching the market and chatting online with a Russian “car selector” in Georgia. The selector helped him find a used Hyundai auctioned in the US.

Many other traders also go for American cars. In January 2022, before the start of Russia’s invasion of Ukraine, Armenia imported $2.8mn worth of cars from the US. But a year later, that number soared to $29.5mn. Since then, the rate has continued to climb. In April this year, Armenia imported $34mn worth of US cars.

Most are bought cheaply in the US at second-hand insurance auctions where cars are deemed totalled by insurers, buyers and brokers said. Then the cars are fixed up at repair shops in Georgia or Armenia. This keeps profit margins strong. Repaired second-hand cars can be sold in Russia for a lot more than their cost, despite the long route they have to take.

It also keeps traders in line with the European sanctions price cap that some local customs officers now insist on.

“That’s why everybody imports smashed-up cars,” the young Russian trader in Gyumri said. “Expensive ones, but battered about enough to be cheaper than $50,000 on the invoice.”

Pavel made his way from St Petersburg to southern Russia by plane and then across the border to Georgia by bus, carrying about 1.5mn roubles ($17,000) in cash. He found the Hyundai in great shape after being fixed at a repair shop.

After clearing it through customs in Gyumri, he was about to drive it home, where he was confident it would be an easy sell.

“Everything’s bad in the Russian market,” he said. “People will buy it because they don’t really have any options, because of the circumstances.”

The number of new cars sold in Russia fell 60 per cent last year, while domestic production — following the exit of western carmakers — plummeted to its lowest since 1991, the end of the Soviet Union, according to a Reuters analysis of Autostat data.

Squeezed supply and depressed household budgets meant Russians bought far fewer cars, used or new, last year. New cars that did get sold were mainly of the homegrown Lada brand, a classic Soviet car. Its market share rose to 37 per cent in the first quarter of this year.

More Chinese new cars are being sold now, too, with the state-owned Chery brand’s market share growing 165 per cent in the first quarter of this year from a year earlier. Russia has become the largest importer of Chinese cars.

Most Russians have turned to buying second-hand cars. Last year, used cars made up almost three quarters of sales. But even this market is getting tight, said Alexander, a young Russian clearing a car at Gyumri customs for his personal use. Prices are steep, and good used cars are getting scarce.

Alexander said he had just sold his Ford Focus in Russia, receiving more money for it now than he paid for it new in 2009, “even though it had aged, its mileage had increased and its condition had worsened”. He chose to use those funds to find a car in the Caucasus, he said, because “Russians have swept up all the half-decent used cars from Germany already”.

Though the west is keen to enforce export controls, there is also a wariness, some analysts said, about stunting the growth spurts of smaller economies in the region that appear increasingly inclined to shed their historic ties to Russia and face the west.

In a recent working paper, the European Bank for Reconstruction and Development noted that while this trade through places such as Armenia amounted to just a small fraction of what Russia used to import from the west, “the amounts involved are large for the intermediary economies” and make “a sizeable contribution” to their economic growth.

A car market on the outskirts of Yerevan, Armenia. Many traders come from Russia to buy second-hand vehicles

Russian customers for used cars can also be found at the Erebuni market in the outskirts of Yerevan, with the snow-capped peak of Mount Ararat floating above. On a recent Saturday, a group of Russians of all ages walked between the lines of cars, looking to buy cars both for themselves and to sell.

The market at Erebuni has existed for decades, but far more Russians are now coming in, one market worker said. The same goes for the protracted import routes in general, according to Alexander, the buyer in Gyumri.

“This business has existed for a long time. It was super popular in the 1990s because the official market hadn’t developed yet, dealers and brands hadn’t entered Russia yet,” he said, referring to the period immediately after the collapse of the Soviet Union when trade was often murky and underhand.

“Now we’re heading back to that,” Alexander said. “The 1990s are coming back.”