‘Sanctions hole’: how secretive routes supply Russia with western tech and consumer goods

Since Vladimir Putin’s invasion of Ukraine, the west has imposed thousands of sanctions on Russia, and handed it the dubious distinction of being the most heavily sanctioned country on Earth.

Targeting everything from the finances of individuals to the major industries of its economy, international sanctions have aimed to isolate Russian consumers, with major brands such as Apple and McDonald’s ceasing their operations in the country.

But two years on, Russia’s economy is showing surprising resilience and is forecast to grow faster than most of the world’s advanced economies, although experts say that it is unsustainable in the long term. With efforts to constrain the Russian economy in the spotlight, the US said on Tuesday that it would announce a sweep of new “impactful” sanctions and export controls at the G7 in Italy this week.

“We’re going to continue to drive up costs for the Russian war machine,” White House spokesperson John Kirby said.

With reports that the US treasury will target financial institutions that help in the transfer of war-related imports – attention is likely to turn to banks in the club of countries that have not imposed sanctions and are facilitating the supply of goods and services to Russia.

The Russian economy has been partly sustained by such imports.

Internal data from the Russian customs agency shows imports rebounding to close to their prewar levels, researchers say, although at considerably higher prices. Those imports have helped sustain vulnerable industries, such as aviation and the car industry.

Observers have referred to this as a “sanctions hole” – where anything from semiconductors to aeroplane parts to iPhones can be routed and re-exported into Russia through firms in China, Turkey or the UAE, or via Armenia, Kazakhstan and other former Soviet republics.

They include highly scrutinised items like microchips for use in the Russian war effort – among them those made by US producers such as Xilinx and Texas Instruments, or processors from Intel. The technology is often bought by companies in Hong Kong or China and re-exported to Russia, the data shows.

“Russia’s invasion of Ukraine exposed a governance crisis in the EU. The EU has become an enabler of the war,” said Robin Brooks, a senior fellow at the Brookings Institution during a webinar on Russian sanctions evasion.

Brooks, who has been tracking the effectiveness of export controls, pointed to examples such as German exports of cars to Kyrgyzstan, up 5,100% since the beginning of the war.

“It is not because people in Bishkek decided that they love Mercedes. These are cars that are going to Russia. This stuff mostly doesn’t even arrive in Kyrgyzstan. Kyrgyzstan just is put on the invoice,” Brooks said.

Export data shows that this trend is happening in “every single European country”, says Brooks.

“It roughly offset about half the drop in direct exports to Russia.”

Studies have revealed that the Russian military has exploited these loopholes to obtain critical western military technology. According to a report by the Royal United Services Institute defence thinktank, more than 450 foreign-made components have been discovered in Russian weapons found in Ukraine.

The US and EU have recently stepped up their efforts against companies and banks in middle countries trading with Russia.

In a speech to German business leaders in Berlin, the US deputy treasury secretary Wally Adeyemo urged companies to stop Russia importing critical components from or via China.

“The US is increasingly putting pressure on banks to address the issue of re-export of dual-use goods from or via China. Without it, battlefield items will flow to Russia unabated,” says Maria Shagina, a senior sanctions researcher at the International Institute for Strategic Studies.

The first direct China-Europe freight train linking southwest China’s Guizhou Province and Russia’s Moscow sets out in November 2021.
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The first direct China-Europe freight train linking south-west China’s Guizhou Province and Russia’s Moscow sets out in November 2021. Photograph: Xinhua/REX/Shutterstock

But some of the countries crucial to Russia’s sanction evasion efforts are resisting western pressure.

In a recent interview with the Financial Times, the chair of Dubai Multi Commodities Centre, the oil state’s main trading hub, said sanctions on Russia were having no impact outside the west, and attempts to stop the flow of business just redirected it elsewhere.

“The fact that the economy is not purely controlled by one side of the world makes these sanctions less effective,” said Hamad Buamim.

“Trade continues flowing, it just flows in a different way.”

‘Great Greek Tanker Sale’
Continuing imports to Russia and sustaining the wider economy would be impossible without the substantial revenues generated from its energy resources – and here too, Moscow has been reliant on outside actors willing to defy the west’s sanctions coalition.

In December 2022, the UK, alongside G7 countries, Australia, and the European Union, implemented a $60-per-barrel price cap to restrict western companies from transporting, servicing, or brokering Russian crude oil cargoes in order to undermine Russia’s oil trade, which is heavily reliant on western-owned and insured tankers.

To ship crude oil abroad and earn much-needed foreign currency, Russia turned to a “dark fleet” of older tankers with murky ownership.

Greek shipping magnates, who wield an outsized role in the global oil trade, have stepped in and sold Russia hundreds of old vessels in a phenomenon dubbed the “Great Greek Tanker Sale.”

According to the trade publication TradeWinds, Greek shipowners have sold at least 125 crude and vessel carriers, worth over $4bn, to bolster Russia’s “dark fleet”.

As G7 leaders meet in Italy, they will face a spectrum of issues, with the challenge of how best to support Ukraine expected to be near the top of their agenda. As things stand, western officials and analysts largely agree that the impact of sanctions on Russia has been slower than hoped.

“So far we have failed on the main objective, which is to get Russia out of Ukraine,” said Brooks.

He argued that the key to hurting Moscow remained in targeting its energy profits. Measures proposed by Brooks and other sanction experts included reducing the oil cap to $20 a barrel and banning the sale of western oil tankers to undisclosed buyers.

“If Europe is willing to take decisive action, we will witness a financial crisis in Russia,” Brooks said.

Article Credit: https://www.theguardian.com/world/article/2024/jun/12/russia-sanctions-hole-backdoor-routes