Chip up the sleeve: How Russia sidesteps sanctions

How Russia sidesteps sanctions

During the war, the EU and the US increased their exports to friendly countries in Russia by $133 billion — even more than what Russia lost due to sanctions. This is according to a study by “Novaya-Europe.”

*Sea containers at the Seagirt marine terminal, Port of Baltimore, Maryland, USA, October 18, 2021. Photo by Jim Lo Scalzo / EPA-EFE*

During the war, exports of European and American goods to many Russia-friendly or neutral countries increased exponentially, surpassing Russia’s losses due to sanctions. An estimated $133 billion worth of “excessive” exports could fully compensate for Russia’s losses. This includes goods necessary for weapon production, which saw a $6 billion increase in exports, roughly equivalent to the decline in shipments to Russia following the full-scale invasion. These findings come from a study by “Novaya-Europe.”

However, by 2024, Russian businesses faced serious difficulties. Due to the threat of secondary sanctions, major banks in China, the United Arab Emirates, and Turkey ceased accepting direct payments from Russia. This affected not only parallel imports and sanctioned goods but also ordinary purchases. Much of the cargo from China, not pre-paid in advance, got stuck as buyers couldn’t settle payments, according to sources from the customs brokerage and logistics fields. By 2024, China had become Russia’s main trading partner, accounting for over 40% of all imports into the country.

Nevertheless, bypass schemes have already begun to emerge. Shipments are being processed through formally unrelated companies in Kazakhstan and other Russia-friendly countries.

“Banks are showing initiative, establishing their own chains and making payments through a so-called ‘bank agent’ scheme,” explains a top manager from one of the logistics companies. This means payments are processed through companies and banks from third countries, which charge a percentage for their services.

The current halt in payments and imports is just a temporary setback, according to experts interviewed by “Nova-Europe.” “Stopping financial transactions is impossible a priori. It’s an absurd idea. You can only increase the cost of operations, transaction costs,” says economist Dmitry Nekrasov. “If the United States consistently pressures or sanctions financial institutions, creating another bank specifically for Russia will become good business, and people will profit from it.”

This applies not only to Russia’s overt allies but also to Western countries turning a blind eye to numerous loopholes in the sanctions regime to continue supplying their goods.

Eternal transit

Before the attack on Ukraine, the European Union was Russia’s largest trading partner. In 2021, according to the Federal Customs Service (FCS), every third item imported into the country came from Europe. Overall, goods worth €89 billion were imported into Russia, according to Eurostat data. With the onset of war, exports from the EU plummeted. In 2022, they dropped by nearly 40% to €55 billion. In 2023, they fell by 60% compared to 2021, totaling €38 billion. Direct imports of European goods into Russia are now as rare as they were in the early 2000s.

Despite the ongoing import of medicines and pharmaceutical products (accounting for a fifth of imports), equipment, tools, alcohol, and chemicals from the EU to Russia, imports from Europe continue to decline. In January 2024, the country officially imported 27% fewer goods than in January 2023.

Export to Russia from the US has always been significantly lower than from Europe. In 2021, according to the FCS, only 5.7% of imported goods came from the States, totaling $16.9 billion. According to US data, their direct exports were even lower, at just $6.4 billion. After the start of the war, trade relations didn’t just sour but almost ceased entirely. In 2023, direct imports from the US to Russia amounted to only $600 million. This level hadn’t been seen since the 1990s.

It may seem that relations are shattered. Russians can no longer access Western goods and technologies. However, in practice, things are not quite so. European and American goods still make their way to Russia, but through other countries, at higher costs and taking longer.

In 2022-2023, the export of European and American goods to many countries friendly or neutral to Russia increased significantly compared to the previous trend in the five years before the full-scale war:

Exports to Kyrgyzstan increased almost sevenfold;
To Armenia, 2.6 times;
To Kazakhstan and Georgia, 1.7 times.

During the first two years of the war, the import of European and American goods into Turkey increased by $55.5 billion, in the United Arab Emirates by $35.6 billion, and in Kazakhstan by $10.4 billion in monetary terms.

Collectively, the countries of the Balkans, Caucasus, and Central Asia, as well as Turkey and the UAE, increased their imports by $133 billion in 2022-2023. Part of this increase may be due to the economic growth of these countries or other factors. The GDP of Turkey, the UAE, and Kazakhstan grew actively in 2022-2023.

However, $133 billion would have been enough to fully compensate for all of Russia’s “losses.” In 2022-2023, its imports from the EU and the US decreased due to sanctions by a lesser amount – $114 billion.

Over the course of two years, Russian businesses managed to build a diversified infrastructure to bypass sanctions. Logistics companies offer transportation of goods through Serbia, Turkey, the UAE, Kazakhstan, and even Saudi Arabia. Businesses have access to warehouses in different countries, repackaging, rebranding, and customs clearance services.

Now, logistics providers offer clients services of affiliated companies (for example, in the EU or Serbia), which can make purchases on their behalf and pay for them, and then send them to Russia. Often, goods are transported along old, direct routes – through the Baltic countries or Poland. This delivery is labeled as “transit,” but in reality, it never leaves Russia.

“Usually, suppliers still know that they are selling to the Russian Federation. But with documents from Turkish, Chinese, or Kyrgyz companies, they turn a blind eye,” explains a top manager of one logistics company.

Dual-use partnerships

In February 2023, after an earthquake in Turkey, US Secretary of State Antony Blinken flew to Ankara. Humanitarian aid, NATO expansion, and support for Ukraine were on the agenda. After Antony Blinken’s visit, parallel imports of European goods through Turkey to Russia sharply stopped.

However, the pause was short-lived, and shipments resumed in April. According to Turkstat data, exports from Turkey to Russia increased in 2023. It exceeded $10.9 billion. This is almost 90 percent more than in 2021.

Throughout 2023, representatives of the EU and the US toured and met with the leadership of Central Asian countries, Turkey, the UAE, trying to persuade them by various means to stop the transit of sanctioned goods to Russia. Periodically, banks of different countries blocked payments for sub-sanctioned goods. However, judging by the data for 2023, if difficulties were created for Russia, they were temporary.

There was no significant decrease in the export of European and American goods, including dual-use items. Most of the countries from our list have been steadily increasing their import of dual-use goods for their own needs since the 2000s. To account for this factor and assess how much the import growth is specifically related to shipments to Russia, we compared purchases of goods in 2022 and 2023 not with previous years, but with the trend line.

Seven out of 18 countries in 2022-2023 either reduced or slightly (up to 20 percent) increased the import of dual-use technologies from the EU and the US compared to the trend. These are Tajikistan, Turkmenistan, Mongolia, Kosovo, North Macedonia, Moldova, and Belarus.

The other 11 countries increased their imports of electronics and equipment by volumes ranging from 21 percent to nine times. In total, this growth amounts to nearly $6 billion. And this is almost equal to the amount that Russia and Belarus “lost” due to sanctions: in 2022-2023, the import of dual-use goods to these countries decreased by $5.9 billion compared to 2021.

The flow of sanctioned goods consists of dozens of “streams” – bypass routes through different countries. In fact, they are laid chaotically, under market pressure. “Anyone who wants to can engage in the supply of sanctioned products and dual-use goods. The infrastructure in Russia that allows this is there, everything is open and official. Anyone can find ways out,” explains a logistics expert.

“Different logistics companies build their infrastructure [in other countries] depending on where it is more convenient to work and on the restrictions of the countries. They differ slightly everywhere,”

adds our interlocutor.

As a result, Russia’s neighbors demonstrate astonishing growth in demand for European and American microchips, optical sights, and machinery. Kyrgyzstan imported nine times more dual-use goods in 2022-2023 than the trend suggested. Armenia – three times. Kazakhstan – 2.3 times.

However, other states have become the real hubs for transshipping critically important technologies. In monetary terms, almost 80% of the increased shipments of goods for weapons production are accounted for by just two countries: Turkey and the United Arab Emirates. In 2022-2023, Turkey imported $2.8 billion more dual-use goods. The UAE – $1.9 billion. For comparison, Kazakhstan saw an increase of only $525 million, while Armenia and Kyrgyzstan saw increases of $90-100 million each.

WERE THESE GOODS SENT TO RUSSIA?

It is important to note: we cannot accurately determine what share of the $6 billion worth of dual-use goods shipments goes to gray imports into Russia. In 2023, many countries — Russia’s neighbors — sharply increased their defense budgets: Armenia (due to the war in Nagorno-Karabakh), Moldova, Turkey, and Kazakhstan. Therefore, such growth may be related to the countries’ own needs for weaponry. Not to mention that such goods — microchips, machinery — are also used for peaceful purposes.

On the other hand, the volume of shipments may be even higher. Dual-use goods may enter Russia through China, Hong Kong, India, and other countries that we did not include in the analysis. Just in 2023, China increased the supply of sensitive goods by a billion dollars, as reported by The Bell. Moreover, in 2023, Russia restored deliveries of critical dual-use goods to 90 percent of the pre-war level, according to the International Sanctions Working Group.

Finally, this only concerns 50 key products essential for arms production. These are far from all dual-use goods being shipped to Russia bypassing sanctions. Nevertheless, thanks to the sanctions evasion, Russia can meet a significant portion of its weaponry component needs.

Who does what best

Russian and global media have repeatedly reported on how Russia circumvents sanctions. Here it is purchasing components for electronic warfare systems. Here it is — microelectronics for drone production. Here — the drones themselves. Here — machinery for the defense industry.

Countries that have increased exports of goods for arms production even have their own “specialization.” For example, the United Arab Emirates is a leader in importing goods from the United States. Turkey and Serbia — from Europe.

Not all countries are willing to transit critical components for the production of precision weaponry to Russia — such as modern memory microchips, processors, and amplifiers. According to data, the United Arab Emirates, for example, has complied with this part of the sanctions since 2023.

However, Kyrgyzstan increased its import of microchips by 42 times in 2022–2023, Armenia by 11 times, and Mongolia by almost four times. But Turkey, a NATO member, has remained Russia’s main partner in supplying goods for missiles and drones. It increased its import of microchips by 60 percent, or $300 million.

The lower the priority of goods on the U.S. list, the more countries are willing to export them. Other electronic components — capacitors and radar equipment — are imported by the UAE, Macedonia, and Georgia. Mechanical components — ball bearings, navigation equipment — may reach Russia through Turkey, the United Arab Emirates, Serbia, and Kazakhstan. Finally, the import of modern machinery unexpectedly increased in all Central Asian countries: Uzbekistan, Turkmenistan, Tajikistan, and Kazakhstan.