By Geraint John
North American and European companies have been urged to ensure that they are not inadvertently supporting Russia’s war effort in Ukraine by facilitating trade through third-party intermediaries.
A year on from its invasion, the U.S. government and the European Union (E.U.) are concerned that Russia is evading stringent sanctions and export controls by importing vital products through neighboring and “friendly” countries.
Earlier this month, the U.S. Departments of Commerce, Treasury, and Justice issued a joint compliance note asking multinational firms to “exercise heightened caution” and be “vigilant in their compliance efforts” to avoid items such as advanced semiconductors and other electronic components ending up in Russian hands.
The E.U., meanwhile, says it is investigating a surge in exports from European companies to customers in countries such as Armenia, Kazakhstan, and Kyrgyzstan, which have increased their trade with Russia since sanctions were introduced in March 2022. It is also reportedly planning to ask these countries to enhance their trade monitoring.
A new Interos white paper notes that the number of restrictions on Russian entities – around 2,500 currently active with more than 1,100 imposed in 2022 alone – are “unprecedented in their scale, scope, and breadth.”
Russia Import Restrictions Are Being Circumvented by “Friendly” Countries
Analysis of official trade data by three economists at the European Bank for Reconstruction and Development (EBRD) found “evidence suggestive of intermediated trade via neighboring economies being used to circumvent the sanctions.”
While E.U. and U.K. exports to Russia “dropped sharply” after the imposition of sanctions, exports to Armenia, Kazakhstan, and Kyrgyzstan (the CCA3) – part of the Eurasian Customs Union alongside Russia and Belarus – increased by between 15% and 90%.
Shipments to CCA3 countries covering almost 2,000 sanctioned products, including armaments, chemicals, dual-use technologies, and sensitive machinery, rose by an additional 30% relative to other goods, according to the EBRD. U.S. exports to Russia and the CCA3 followed a similar pattern last year, albeit at lower volumes.
At the same time, Armenia, Kyrgyzstan and Georgia all recorded “significant increases” in exports to Russia (see chart). This, says the EBRD paper, suggests that new supply chains have been set up to channel sanctioned products to Russia from these countries, “not necessarily with the knowledge of the Western exporter.”
But direct sales to Russia also remain a concern. This week, PBS News accused a major American machine-tool manufacturer of flouting export controls by supplying a Russian distributor with vital spare parts, which could be used for military purposes, for months after those controls were imposed last year.
Exports to Russia From Armenia, Kyrgyzstan, and Georgia – January 2020-August 2022
Separate analysis by the Silverado Policy Accelerator, a U.S. non-profit organization, published in January argued that former Soviet states “have become key transshipment points for goods that are ultimately sent to Russia.”
It also noted that Russia had significantly increased its imports from non-sanctioning countries such as China and Turkey. These included semiconductors (see chart), machinery, and heavy trucks, as well as consumer goods such as smartphones and domestic appliances.
Exports of Integrated Circuits to Russia From China and Hong Kong – January-November 2022
In recent months, U.S. officials have called on China, Turkey, South Africa, and the United Arab Emirates ( UAE), among other countries, not to help Russia evade its sanctions.
Together with their E.U. and U.K. counterparts they are also reported to have visited the UAE to express concern that it is becoming a key shipment hub for electronic components and other sensitive products being re-exported to Russia.
The E.U. recently imposed sanctions on a Dubai-based subsidiary of the Russian state-owned shipping company Sovcomflot, a key player in supporting the country’s energy revenues, as part of a new package of measures.
Russian Interests and Indirect Business Relationships
Russian ownership of foreign entities is one potential type of supply conduit of sanctioned goods into the country.
Interos’ global relationship platform highlights 166 entities based in the UAE that are wholly or partially owned by Russian interests.
Similar numbers are located in both Armenia and Hong Kong, according to the data, although these are dwarfed by the thousands of entities registered in European countries such as the Czech Republic, U.K., Germany, Latvia, Bulgaria, and Italy.
Another source of supply is links between Western firms and intermediaries in countries accused of supplying Russia’s war effort. Our analysis here reveals:
- Almost 700 relationships between Russian end customers and 170-plus distinct suppliers in China, Turkey, India, Uzbekistan, and other Central Asian countries.
- More than 8,100 relationships between these suppliers and over 1,750 distinct Western firms in the U.S., Canada, E.U., and U.K.
What this shows is that the global network to support deliberate or inadvertent illicit trade with Russia – so-called “supply chain washing” – is extensive and the risks of breaching sanctions and export controls are high.
“Red Flags” to Watch Out For
In their “tri-seal compliance note” published on 2 March, the U.S. Department of Commerce (DOC), Department of the Treasury and Department of Justice (DOJ) urged companies to be on the lookout for “warning signs of potential sanctions or export violations.”
It listed 13 common “red flags” to watch for, including:
- The use of shell companies to obscure ownership, origin, and funding sources
- A reluctance by customers to share information on product end-use
- Last-minute changes to shipping instructions
- The use of residential addresses and personal e-mail accounts
- Transactions with entities that have little or no web presence
- Routing of products through transshipment points in China, Turkey, Armenia, and other countries that have boosted trade with Russia.
The note emphasizes that the DOJ “has pursued criminal charges against those who it alleges are using front companies and intermediate transshipment points to evade Russia-related U.S. sanctions and export controls”.
Separately, the DOC’s Bureau of Industry and Security has published a compendium of its investigations into sanctions busting in several countries, including Russia, to illustrate the legal and financial penalties that can result from non-compliance.
A group of E.U. countries, including France and Germany, has also recently been pushing for tougher action against companies found to be circumventing sanctions and aiding Russia’s war effort.
A Call to Action to Uphold Russia Import Restrictions
In the light of these warnings and developments, procurement, supply chain, and business leaders at Western companies should:
- Screen both existing and new customers using the latest U.S., E.U. and other restrictions lists – information that is updated regularly on Interos’ Resilience platform.
- Understand the direct and indirect relationships their organizations have with firms in high-risk intermediary countries for sensitive and sanctioned products.
- Ensure that their due diligence and risk management programs empower staff to report any concerns and potential breaches of sanctions rules in a timely manner.
Although Russia has clearly been able to obtain many products from alternative sources in the year since Western sanctions were massively stepped up, there is little doubt it is paying a high price (literally) for Vladimir Putin’s actions.
Stories about microchips being removed from washing machines and other consumer products to supply its military machine suggest that its ability to weather the ever-growing list of restrictions has been limited so far.
However, as the war drags on further into its second year, alternate supply chains may begin to pick up more of the slack – hence the current focus and call to action by U.S. and European governments directed at companies around the world.