Russia has managed to largely bypass Western sanctions on technology and semiconductor imports to supply itself with technology to keep its economy working and build sophisticated weapons, Bloomberg reported on March 4.
A senior European diplomat told the wire service that Russia may be sidestepping EU and G7 sanctions to procure vital semiconductor and other technologies for its war in Ukraine. The suggestion that Russia is successfully using middlemen and transit via “friendly countries” was backed up by a recent report on trade conducted by the European Bank for Reconstruction and Development (EBRD).
Amongst Russia’s most important trade sanction busting partners are Turkey, the United Arab Emirates and Kazakhstan, Bloomberg reports.
“Despite sanctions Russia is getting nearly all it wants and needs,” Elina Ribakova, deputy chief economist at Institute of International Finance (IIF), told bne IntelliNews in a recent podcast on sanctions effectiveness.
Despite multiple rounds of sanctions from the EU and G7 since the invasion of Ukraine a year ago, Russian imports have largely returned to their pre-war 2020 levels. Some officials believe that the impact of the sanctions is falling short of what was hoped for.
Shipments from China to Russia have surged and are now approaching a record $200bn turnover, with Beijing playing an increasingly important role in supplying Moscow. While those countries outside the EU haven’t imposed their own sanctions on Russia, most have repeatedly denied they are helping the Kremlin.
The EU has targeted many of Moscow’s key revenue sources and has imposed sanctions on nearly 1,500 individuals and restricted exports on hundreds of goods and technologies. However, officials are concerned that the bloc lacks an effective apparatus to enforce these measures, and that it lags behind the US, which has a longer history of sanctioning foreign powers.
In the US, there is a centralised agency and more efficient procedures for gathering information, as well as stringent legislation and tools to enforce the rules at home and abroad. In contrast, enforcement in the EU is a patchwork effort that mostly falls to member states. While the European Commission monitors implementation and provides guidance, national authorities are responsible for identifying breaches and imposing penalties, leading to inconsistent results.
Ultimately, it’s about political will, said one EU official involved in the process, and national officials can come under pressure when it comes to taking tough action against their own companies.
“Sanctions have not stopped Russia’s import of controlled and dual use high tech goods critical to its ability to wage war on Ukraine, such as UAV/parts and microprocessors/semiconductors. UAV deliveries continued to Russia as late as November and December from UAE, Hong Kong, China, and Singapore. Russia’s imports of microprocessors/semiconductors increased from $1.82bn in 2021 to $2.45bn in 2022 (for the year as a whole). China has become Russia’s most important source of semiconductors and integrated circuits. In 2022, China, Hong Kong, Germany, the Netherlands and Finland led by dollar value of microchip sales to Russia; China, Hong Kong, Estonia, Turkey and Germany led by the number of transactions,” Economists at the Free Russia Foundation found in a report on the effectiveness of sanctions.
“The sanctions regime, closely coordinated by the US and EU, was able to disrupt the Kremlin’s direct access to western technology in the short term. Russia established alternative routes fairly quickly with imports of dual-use and controlled commodities now exceeding pre-war levels. Our data shows that countries most actively facilitating circumvention of wartime sanctions by Russia include: China, Turkey, Cyprus and the UAE. In 2022, China became Russia’s most important trade partner, receiving about 20% of Russia’s total exports and serving as the source of 35% of Russia’s total imports,” the economists added.
Turkish exports of similar semiconductors to Russia, rose from $79,000 in 2021 to $3.2mn in 2022, United Nations data shows. And Turkey, which has also declined to endorse US and European sanctions on Russia, has become a major exporter of overall electronic equipment to Russia.
Russia's tech import volume between April and November reached $2.6bn, while at least $777mn was used to purchase products of Western manufacturers, according to a Reuters investigation.
Moscow obtained microchips produced by US Intel, AMD, Texas Instruments Inc, Analog Devices Inc, as well as Germany's Infineon AG. These microchips are used to build missiles to strike Ukraine's territory, Reuters reported.
Turkey's Azu International Ltd Sti registered in March 2022 as a venture that sells IT products in bulk and started supplying US spare parts for computers to Russia the next week. The investigators learned that the company exported and computers and parts for them to Russia worth at least $20mn.
Turkish trade with Russia in general has soared as it steps in to facilitate trade of non-sanctioned goods and supply Russia with a vast array of consumer goods that have disappeared from the market after some 1,000 Western brands decided to pull out of the Russian market. However, their goods are still reaching the Russian market under parallel import schemes.
Baltic States route
The Baltic States have emerged as a key route, with two companies in Estonia massively increasing shipments of semiconductors to Russia. It appears that traders with Russian connection have made use of Estonia’s famous e-residency scheme to set up virtual companies and use them to transit semiconductors sourced in China and elsewhere for transshipment to Russia.
At the end of January the Council of Europe lambasted Tallinn for the scheme and said it was facilitating the creation of money-laundering risks because of weak background checks, says the Moneyval committee.
Likewise, as bne IntelliNews reported, over 260 Lithuanian companies continue to trade with Russia, despite that country’s ardent support for the Ukrainian cause. Only a little bit more than one in every two Lithuanian companies that had business ties with Russia cut them after the invasion, according to the State Data Agency, Registru Centras, LRT.lt, the website of public broadcaster LRT, reported on January 4. But that left more than 260 Lithuanian companies still exporting to the aggressor country. According to the agency, Russia’s tech import volume between April and November reached $2.6bn, while at least $777mn was used to purchase products of Western manufacturers.
The Baltic ports are also buzzing with activity. The Port of Riga recorded an increased container cargo volume with 460,700 TEUs in 2022, a record-high cargo turnover rate, exceeding the previous year's result by 16%, and transhipped 326,000 TEUs, which is the highest annual turnover in its history.
In 2022, the Port of Tallinn saw 18mn tonnes of cargo pass through the port, a 21% decrease y/y, due to the implementation of sanctions on Russian and Belarussian cargo. However, the decline in liquid bulk and dry bulk volumes due to sanctions was somewhat offset by growth in all other cargo types, the port said.
Middle corridor route
With China-Europe cargo forwarders looking to offer businesses the option of freight routes that avoid Russia, Turkey and other countries in the region are keen to help equip and build up the Middle Corridor, officially the Trans-Caspian International Transport Route (TITR) – connecting East Asia to Europe via Kazakhstan, the Caspian Sea, Azerbaijan, Georgia and Turkey.
As reported by bne IntelliNews in 2022, cargo dispatchers in China faced with sending goods to Europe via either Russian or Kazakh territory are increasingly opting for the latter. Volumes dispatched via Kazakh railways are booming, as is transport via Aktau and other Caspian seaports. The head of the Aktau Sea commercial port, Abai Turikpenbayev, forecast in mid-2022 that the volume on the TITR would increase sixfold during the year to up to 3.2mn tonnes.
Moreover, there is a new impetus to develop long-discussed routes westwards out of China, including the China-Kyrgyzstan-Uzbekistan (CKU) railway.
At the same time the European Bank for Reconstruction and Development (EBRD) stands ready to invest billions of euros in developing cargo routes between Europe and Asia that bypass Russia, as the tussle for control of trade routes across the Eurasia landmass gets underway.
Kazakhstan has become a key transit country for Russia to bypass Western sanctions and acquire advanced semiconductors and other technologies necessary for its war in Ukraine, according to a senior European diplomat. In 2022, Kazakhstan exported $3.7mn worth of advanced semiconductors to Russia, up from $12,000 the year before the war started.
The data suggests that Russia has largely returned to its pre-war import levels, with advanced chips and integrated circuits made in the EU and other allied nations being shipped through third countries such as Turkey, Serbia, the UAE, and other Eastern European and Central Asian economies. Shipments from China to Russia have also increased as Beijing plays an increasingly important role in supplying Moscow.
The EU and G7 countries have introduced multiple rounds of sanctions since the invasion of Ukraine in an effort to degrade Russia's war machine and undermine its economy. However, the real impact of these sanctions in some areas is falling short of what officials might have hoped for. The situation is especially acute when it comes to advanced chips and integrated circuits that can be used for military purposes.
To tighten any loopholes and prevent sanctions from being circumvented, the EU and its allies are increasingly focused on improving enforcement mechanisms. The US, with its longer history of sanctioning foreign powers, has a centralised agency and more efficient procedures for gathering information as well as stringent legislation and the tools to enforce the rules at home and abroad.
In contrast, enforcement in the EU is a patchwork effort that mostly falls to member states. While the European Commission monitors implementation and provides guidance, national authorities are responsible for identifying breaches and imposing penalties, leading to inconsistent results. Ultimately, political will is crucial, and national officials can come under pressure when it comes to taking tough action against their own companies.
Commission Vice-President Valdis Dombrovskis noted that EU sanctions are contributing to a sustained economic recession in Russia but their effectiveness also depends on how well they are enforced. With Russia's war in Ukraine continuing into its second year, the EU and its allies must remain vigilant in their efforts to prevent the circumvention of sanctions and tighten any loopholes.
In what is rapidly turning into a game of whack-a-mole, Western powers are starting to crack down on sanction busters. Germany has introduced tough new laws to prosecute companies and businessmen that are actively bypassing sanctions. At the same time, both Europe and the US have launched major diplomatic efforts to put pressure on countries that are facilitating Russian trade to stop, without much success so far.
The Biden administration issued a compliance note on March 2 targeting intermediaries who facilitate the illegal redirection of restricted items to Russia, naming China, Armenia, Turkey and Uzbekistan as potential locations for such activities.
Last week, the G7 announced a new mechanism to strengthen enforcement, while the EU has introduced several tools in its recent packages to go after those aiding Russia. However, EU countries have been hesitant to use some of those tools and pursue potential breaches at home, at least publicly.
Discussions on toughening up the EU’s enforcement regime have raised debates over where the share of responsibilities between Brussels and Europe’s capitals should lie when it comes to policing measures, officials and diplomats say.
Toms Platacis, the acting director of the Latvian Financial Intelligence Unit, said that it would be more convenient for everybody if there was one EU level institution in charge. Latvia has criminalised sanctions violations, while other EU countries have not, making it possible for violators to “look for other countries where evading sanctions carries less potential penalty,” Bloomberg reported.
Europe remains deeply compromised as its efforts to sanction Russia have been mitigated by its efforts to avoid too much economic pain. The US does not have these problems as it remains largely autonomous from imports of key raw materials and energy. As a result there has been a tendency in Europe to offer calve outs and exceptions to some key sanctions, like shipping or the import of fertilisers, or turn a blind eye to some of the more obvious import schemes of good travelling via third countries to Europe.
This has at times led to arduous discussions between member states over exemptions and reporting requirements, as there is no unity within the EU on the sanctions policy.
One senior European minister told Bloomberg that with every round of sanctions, "we take a step forward with new measures and one step back with new exemptions."