Armenia's smuggling playbook "Good friend" keeps Russian economy afloat

In addition to unprecedented military-political tension, the Russian-Ukrainian conflict has turned into an energy and food crisis, as well as the rupture of trade and transport communications on the vast Eurasian space. However, as is always the case with large-scale conflicts, there were states that made a good hand with the sanctions confrontation between the collective West and Russia. One of these is Armenia which has almost tripled its exports of various goods, components, and equipment to the Russian market. Re-export of products, including dual-use items, imported from Asia, the EU, and the US, plays a significant role in this trade growth. In this regard, Armenia has been repeatedly mentioned in the global media as one of the countries violating the sanctions regime.

Armenia's involvement in re-exporting foreign products and equipment to Russia, including dual-purpose goods subject to the sanctions, bypassing Western sanctions, has been repeatedly mentioned in the Western and post-Soviet media.

The "country of stones", which lacks a developed industry and is trapped in a transport deadfall, has suddenly increased its export-import operations since last February without any economically substantiated preconditions. And not only with its traditional trading partners in the region but also with very distant countries, trade with which in the recent past was estimated at the level of statistical error.

According to the data of the Statistical Committee of Armenia, at the end of 2022, Armenia's total foreign trade turnover increased 69% compared to the previous year, reaching $14.1 billion, including a 78% increase in exports from Armenia - to $5.3 billion, and 63.5% increase in imports - to $8.7 billion. For comparison, a year earlier, the foreign trade turnover of Armenia, which was in stagnation after the pandemic crisis and loss in war, barely reached $8.38 billion with a slight annual increase.

These processes were most conspicuous in Armenian-Russian trade: the trade turnover with Russia, Armenia's main trading partner, increased by 92% in 2022 and exceeded $5 billion. However, the most surprising thing is not even the growth in the trade itself, but the qualitative change in its structure: over the 30 years of independence, Russian imports have always had the lion's share of bilateral trade turnover, which is not surprising given the fragility of the Armenian economy, which sells mainly concentrates of the ore for non-ferrous metallurgy, fruit, and vegetables, as well as fruits and vegetables.

Obviously, Armenia's industrial production is simply not capable of providing such a large volume of supply, let alone agriculture, which has been in decline for the second year in a row. But with the start of the Russo-Ukrainian war, Armenia's exports to Russia unexpectedly nearly tripled from $841 million in 2021 to $2.411 billion last year. Most experts attribute this sharp increase in Armenian-Russian trade turnover, including the share of Armenian exports, without any serious economic basis, to only one factor - the re-export through Armenia of goods subject to sanctions or restricted to direct sale in the Russian market.

It is worth recalling here that in the past Armenia had a great deal of experience in smuggling sanction-banned goods, raw materials, microchips, computers, various machinery, and production equipment from the US, the EU, Japan, the Republic of Korea, and South-East Asian countries into the Islamic Republic of Iran. At one time, many Armenian companies made a profit on intermediary services, ordering in highly developed countries dual-use products allegedly for the needs of local production, and then, by reissuing orders and skillfully covering their tracks, all this was secretly imported into Iran. Similarly, Armenian banks connected to the SWIFT international payment system easily opened correspondent accounts for Iranian entrepreneurs and state-owned companies, helping them to pay for services and transfer payments to settle dubious transactions in the international market.

Today, this wealth of experience in circumventing sanctions is also successfully used in Armenian-Russian relations. For example, last year, total polished diamond exports from Armenia quadrupled to about $418 million: in this case, re-exports go in the opposite direction - finished polished stones from Russia are resold and, through Armenian intermediaries, sold mainly to the UAE.

However, the main re-export scheme operates in the reverse direction - from Armenia to Russia, and the growth rate of Armenian transit shipments is directly proportional to the dynamics of Russia's deteriorating relations with EU countries, the UK, and the US. For example, while in the first half of the year, Armenian exports to Russia amounted to about $546 million, in the second half of the year, following the introduction of the most severe package of anti-Russian sanctions, it more than tripled to $1.860 billion. That is, there is a direct correlation between the tightening of Western sanctions and the increase in the transshipment of banned goods needed by the Russian market through Armenia.

However, the government of this country does not conceal the fact that the republic owes last year's foreign trade successes to re-exports. For example, Minister of Economy Vahan Kerobyan has recently repeatedly stated that Armenia re-exports to Russia goods produced abroad, stressing that they are not sanctioned, saying that the government monitors it in order to avoid secondary sanctions.

Is it true? Alas, the structure of Armenian imports by country and commodity group gives reason to doubt that Yerevan is telling the truth about compliance with the sanctions restrictions. The results of investigations by the media and a number of international agencies show that last year Armenia increased its imports from the EU and the USA by 80% and at the same time became a regional transshipment base for supplies of electronic goods and microchips, computers and peripheral IT equipment, machine tools and industrial equipment, cars and spare parts for them to the RF. Most of these can be classified as dual-use products.

The Armenian domestic market is extremely narrow, and consumer demand is extremely low due to the poverty of the population, and this situation has not changed for decades. However, last year the supply of various electronic and other high-tech products to the Armenian market from countries with which, a little more than a year ago, trade was carried out on a purely formal level, increased many times over. Thus, according to the South Caucasus Research Centre, exports to Armenia from faraway Vietnam increased in 2022 by 380% - to $175 million (mostly electronics), supplies from Mexico (cars and spare parts) by 324% - to $60.9 million, exports from Japan (equipment and electronics) by 252% - to $195 million, from India by 190% - to $259.2 million. Exports from the "Asian tigers" - the world's leading manufacturers of electronics - a bottomless storehouse of chips and microchips, so scarce and in demand by the Russian military industry, have grown at a similarly dynamic pace. Thus, shipments to Armenia from the Philippines increased by 181% - to $9.5m, from Thailand - by 131% - to $54.7 million, from Malaysia - by 131% - to $26.9 million, from the Republic of Korea - by 102% - to $94.8 million. It is quite obvious that all these electronic imports are simply not needed in the Armenian market and all the production without unpacking containers, immediately after being processed at the Armenian customs with new shipping documents is reloaded onto trailers heading to Russia.

As a reminder, at the end of February this year, the EU countries approved the tenth package of sanctions, which includes a number of measures aimed at eliminating loopholes in the existing regime, including a ban on the transit through Russia of goods that can be repurposed for military use. In particular, even ordinary household goods - TV sets, washing machines, computers, office equipment, etc. - may be dual-use: a few months after the start of the war, the Ukrainian army began to report that some microchips they found in captured military equipment or downed Russian UAVs had been soldered from the chips of household appliances. In turn, machinery and equipment imported in transit through Armenia could be used not only in the civilian sector but also repurposed to produce ammunition and military equipment.

It should be noted that such high foreign trade activity of Armenian businesses in the Russian direction has attracted the attention of the relevant EU structures. As EU sanctions envoy David O'Sullivan told the Financial Times not long ago, the EU and its allies are investigating a sharp increase in exports from Russia's post-Soviet trading partners. According to the European media, Armenia is also on the list of suspects, causing the greatest wariness among post-Soviet countries due to the incompatibility of its foreign trade activities with a relatively insignificant volume of the domestic economy and, nevertheless, almost simultaneously increased exports to the Russian Federation by more than two times.

Incidentally, according to Armenian media reports, Pashinyan was "harshly" warned in Germany against helping Russia circumvent sanctions. Western politicians strongly warned Armenian Prime Minister Nikol Pashinyan, who visited Germany, to close the channels of "parallel exports" and bank transfers to Russia and not to help Russia overcome the "heavy burden of Western economic sanctions". According to media reports, Pashinyan allegedly invited the chairman of the Central Bank, members of the government, and the head of the State Revenue Committee back to Armenia and instructed them to strictly close such channels of assistance to Russia.