FP: No, Russia not massively skirting sanctions

Foreign Policy (FP) has released eight takeaways about Russian evasion of Western sanctions. Caliber.Az reprints the article.

Reading media reports, one could get the impression that Moscow is easily skirting Western sanctions. Articles abound describing how murky firms in Kazakhstan, Türkiye, or the United Arab Emirates are funneling shipments of technology and other sanctioned goods to Russia. Trade statistics also show unusual spikes of shipments from several European Union countries to Armenia in 2022, suggesting that this country may have turned into a hub for sanctioned trade. Moscow agrees: The Kremlin has long denied that sanctions are even having an impact on the Russian economy.

Yet a sober look at the data paints a more nuanced picture. Russia is certainly managing to evade some sanctions, but on a scale that is probably more limited than media reports and Kremlin statements claim. Here are eight key takeaways from what we really know about Moscow’s sanctions-dodging.

1. Not all Russian trade is sanctions evasion. Only the United States, the European Union, and some of their allies are imposing sanctions on Russia. This means that only Western companies need to respect sanctions, both in their direct dealings with Russia and their business with third countries. (If a European firm records a jump in sanctioned high-tech exports to Kazakhstan, it is required to investigate whether something fishy is going on). Conversely, countries not participating in sanctions are mostly free to do business with Russia as they please.

Even in Western economies, many firms can still trade with Russia. EU sanctions, for example, cover just per cent of the bloc’s exports to Russia, based on 2021 trade data. Western governments have not imposed sanctions on food, medical supplies, and other civilian goods in order to avoid harming ordinary Russians. As a result, sanctions did not prevent Europe’s exports of food and medicine to Russia from increasing in 2022. Also up are Russia’s wheat exports, which boomed to record levels last year, although part of the increase may be due to illegal shipments coming from occupied Ukraine.

2. Evasion is as old as sanctions. In 1806, French Emperor Napoleon Bonaparte imposed an embargo against British trade: Ships coming from Britain could not unload cargo in French ports or those of French-controlled Europe. The British quickly adapted to what became known as the Continental Blockade, providing one of the first modern examples of sanctions evasion. London reoriented trade routes towards the United States and established smuggling routes to continental Europe.

Fast-forward to the 21st century, and all sanctions regimes are being circumvented in some way. North Korea is illegally importing oil, thanks to ship-to-ship transfers between untracked oil tankers in the East China Sea. Iran periodically manages to send oil cargoes to Greece. As long as sanctions exist, various actors—from murky entities to respected European banks—will cash in by helping sanctioned countries or firms skirt these measures. This does not mean that sanctions do not work. Quite the opposite: If sanctions had no impact, demand for complex, risky, and time-consuming schemes to dodge them would be far lower

3. Evading sanctions is hard for a big country like Russia. Western sanctions against Russia are comprehensive, targeting both Moscow’s access to finance and its ability to trade. Since 2014, sanctions have made it nearly impossible for the Kremlin to raise money abroad for energy projects. After the 2022 invasion of Ukraine, Western countries started to target Russian imports of high-tech goods (such as semiconductors) in a bid to constrain Russia’s ability to build military gear, as well as exports of hydrocarbons to curb the Kremlin’s revenues.

The Russian economy is so large that schemes to evade sanctions or shift trade elsewhere cannot fully make up for lost business. This is not surprising: Russia is the world’s ninth-largest economy, with imports of more than $300 billion in 2021. For small countries, such as North Korea, Cuba, or Belarus, successful sanctions-dodging can be small enough to happen under the radar—for instance, through so-called suitcase trade in smuggled goods. Conversely, doing illicit business with Russia on a scale large enough to meet the needs of its nearly $2 trillion-a-year economy would be hard to conceal.

4. China is not a major enabler. China is not big on evading sanctions. Last year, Beijing imported more oil and gas from Russia than it did in 2021. However, this was not sanctions evasion, since firms around the world are free to buy Russian oil as long as it is priced below $60 per barrel if Western shipping companies or insurance firms are involved. When it comes to exporting goods to Russia, Chinese firms appear to be cautious: Chinese customs data shows that there is no sign of a boom in China’s shipments to Russia.

Two reasons underpin Beijing’s lack of willingness to evade sanctions. First, China is struggling just as much as Russia to get hold of advanced microchips; in 2022, Western countries curbed the ability of both Russia and China to import sophisticated semiconductors and the equipment to make them. Second, Chinese businesses worry that the United States could soon impose secondary sanctions on Russia. In such a scenario, Chinese firms would need to exit the Russian market in a rush—or risk being sanctioned themselves.

5. Russia is not swamped with smuggled high-tech goods. Russia’s high-tech imports from several nonsanctioning economies, such as Armenia, Türkiye, Kazakhstan, and the United Arab Emirates, have surged over the past year, giving credence to the idea that Moscow is easily dodging sanctions. Media reports on this issue conveniently forget to mention that there is a catch: Such eye-popping growth rates invariably come from a very low base.

Take Türkiye, whose semiconductor exports to Russia quadrupled in 2022. That sounds like a lot—until you note that the total reached only $489 million at most—and probably less since this amount includes other advanced electronic products. Although this figure does not capture smuggling, even several times the amount would remain far below Russia’s needs. In 2021, Russia’s imports of high-tech components, including semiconductors, topped $13 billion, and Russia’s microchip needs have no doubt increased further since the start of the war; semiconductors are a critical component for missiles and other military gear. If Russia were really swamped with smuggled semiconductors, it would not have to resort to harvesting chips from fridges or dishwashers, as has been widely reported.

6. Oil exports remain an area of concern. Western countries are seeking to curb Moscow’s revenues through restrictions on Russian oil exports. These measures take two forms: embargoes on imports of Russian crude (in the EU, for instance) and the G-7 oil price cap, which prevents Russia from exporting oil priced above $60 per barrel whenever Western companies are involved. The cap has had mixed results: It appears to be well-respected in Russian Baltic Sea ports, which mostly serve India now, but less so in Russia’s Far East, from where oil is shipped to a variety of emerging economies.

The data is stark: In the first quarter of 2023, per cent of the oil shipped from the huge Russian Pacific Ocean port of Kozmino was sold above the price cap, for an average price of $73 per barrel. More than half of these shipments involved Western shipping or insurance firms, pointing to widespread illegal evasion of the G-7 price cap. Looking ahead, implementing the oil price cap could also become increasingly difficult as Moscow builds a sanctions-proof supply chain to export its oil, complete with Russian-owned ships and insurance services.

7. Tackling sanctions evasion is hard. Tackling sanctions evasion is like whack-a-mole; as soon as one loophole is closed, various actors get busy creating other lucrative schemes to circumvent sanctions. This does not mean that nothing can be done to address this issue. Convincing third countries not to turn a blind eye to sanctions evasion is a first step. It may yield results: In September 2022, Uzbekistan, Kazakhstan, Türkiye, and Vietnam abruptly stopped using Mir, Russia’s payments system for fear of breaching U.S. sanctions.

Secondary sanctions are another option. Only the United States uses such penalties, which force companies around the world to make a choice between trading with the sanctioned country or the United States. Most firms choose to stay in the U.S. market. So far, U.S. secondary sanctions target only the Russian defence sector, but they could be expanded to other areas. Washington will tread carefully: Russia is such a big commodity exporter that imposing secondary sanctions on Moscow would fuel a spike in commodity prices.

8. Sanctions evasion does not mean sanctions do not work. In the first quarter of 2023, Moscow’s receipts from oil exports fell by $15.6 billion compared the same quarter in 2022, a drop of 29 per cent. Around three-quarters of this drop was due to sanctions; the rest was mainly the effect of declining oil prices. As a result, over these same three months, the Russian Finance Ministry reported a $30 billion government budget deficit, a whopping 82 per cent of the full-year deficit target. This is making it harder for the Kremlin to finance the war. Sanctions evasion is happening, but the bigger picture is a different one. Sanctions are working, and evasion is not much more than a drop in the ocean.