In the year and a half of Russia’s full-scale war in Ukraine, the EU has imposed 11 packages of sanctions on companies and individuals to deter the Russian war machine. But so far, this pressure has not been enough to stop the war and the deaths of Ukrainian civilians. Moreover, not only the Russians themselves, but also giant companies around the world are looking for ways to circumvent the sanctions.
Expectations from the first sanctions imposed on Russia by the EU can be considered exaggerated without exaggeration. The collapse of the Russian economy, focus on its own problems, rapid loss of equipment on the battlefield and economic isolation of Russia – this is how the future of Russia was imagined after compliance with all sanctions policies.
“Our sanctions are severely eroding Russia’s economic base, taking away any prospects for modernization. We will prosecute those who help Russia to circumvent sanctions or replenish its military arsenal,” commented Ursula von der Lein, President of the European Commission, at a press conference on February 24, 2023.
Thus, in 2022, Russia was recognized as the country with the largest number of sanctions imposed on it. However, this did not stop the war in Ukraine, because the success factor of sanctions should be preceded by their strict control. And with the experience of long-term relations built by Russia and oil and gas “needles” in dozens of countries, this control needed to be doubly strong.
EFFECTIVENESS OF SANCTIONS AGAINST RUSSIA
The effectiveness of sanctions against Russia cannot be denied, as their efficiency is a long-term process. Sometimes, sanctions that have a significant impact on certain sectors of the Russian economy can take a long time to be adopted, or they take effect after a certain period of time. For example, oil sanctions with a six-month delay came into effect on December 5, 2022, and fuel sanctions on February 5, 2023. This time was given to the EU countries to find new ways to supply energy resources to reduce pressure on the economy.
In the first quarter of 2023, the Russian budget lost 2000 billion rubles due to sanctions restrictions, which is equivalent to 243 Kalibr cruise missiles, which USCC wrote about in April. A comparison of the lost funds with the number of possible missiles produced by Russia directly illustrates how sanctions can save lives.
Of the entire spectrum of sanctions measures, the most tangible for Moscow was the refusal of European countries and the G7 to buy Russian energy resources. Prior to the full-scale invasion, about 40% of the federal budget was generated by oil and gas export revenues. In the first half of 2023, Russian budget revenues from oil and gas fell by 47% to 3.38 trillion rubles ($37.4 billion) compared to the same period in 2022.
The KSE Institute in its final analytical report states that in 2023, only due to the oil price ceiling, the embargo on Russian oil imports by sea and the refusal to buy Russian natural gas, Russia’s oil and gas revenues will drop by half to $166 billion. In its report, the EU emphasizes that due to sanctions restrictions, exports from the EU and imports from Russia fell by more than 50% in 2023 compared to 2021, leading to an “unprecedented breakdown in trade ties.” The U.S. Treasury Department states that sanctions have significantly worsened the state of Russia’s military-industrial complex and defense supply channels, but have not completely stopped the military-industrial complex.
Instead, Russia has largely managed to establish imports of necessary components bypassing the sanctions. From now on, European governments are faced with the task of limiting Russia’s ability to circumvent sanctions. In particular, for this purpose, the EU created the 11th sanctions package. Since its launch, 87 new entities have been added to the list of those who directly support Russia’s military-industrial complex in its war of aggression against Ukraine. In addition to the Russian and Iranian entities already under sanctions, this now also applies to legal entities registered in China, Uzbekistan, the United Arab Emirates, Syria, and Armenia. On September 14, the United States announced the imposition of sanctions against five Turkish firms that help Russia conduct foreign trade. In total, the United States imposed new sanctions against more than 150 companies from around the world, including the European Union.
“Autumn should be the time for a new package of EU sanctions against Russia,” President of Ukraine Volodymyr Zelenskyy comments on the current situation. The world’s media are reporting on active work on the 12th package of sanctions. New restrictions may be presented in the first half of October or announced during the EU-US summit.
SANCTIONS VIOLATORS
The main scheme of procurement of the sanctioned goods by Russia is through the re-export of the components by intermediaries from third countries that have not adopted sanctions.
Companies that cooperate with the Russian military-industrial complex do not legally violate any restrictions, but in fact help to circumvent them. For procurement purposes, fictitious “intermediary companies” are used, which are massively created and changed. Their number is growing and in some cases can even reach dozens around one order to confuse the traces. It has been recorded that sanctions are most often circumvented in China, Turkey, Kazakhstan, the UAE, Thailand, Armenia, and Kyrgyzstan. For example, in January-February 2023, 80% of components totaling $211 million came to Russia from China (including 46% from Hong Kong). Thailand is in second place with a share of 5.5%, according to The Guardian.
One way to circumvent sanctions was to transit electronics and dual-use goods through Russia. According to the Financial Times, after February 24, 2023, $2 billion worth of “dual-use” goods were imported from the EU under the pretext of transit. Half of these goods (gas turbines, soldering irons, radio equipment, aircraft components, optical equipment, etc.) worth $1 billion remained in Russia due to false final destination points in EU customs declarations.
In June 2023, Jim O’Brien, the US State Department’s sanctions coordinator, said that exports of coremicrochips and electronics needed by Russia’s military-industrial complex had returned to the level of 2022, as Moscow had learned how to circumvent the sanctions imposed on it better.
The latest report by the international Ermak-McFall expert group analyzes 1,057 foreign components of captured Russian military equipment and shows that the Russian military-industrial complex has continued to access Western technology since the beginning of the war, throughout 2022 and the first quarter of 2023, while maintaining the necessary supply chain through third countries. The 155 companies whose products were identified in Russian weapons accounted for $2.9 billion in sales of critical components to Russia in 2022.
A separate stumbling block to the effectiveness of the sanctions policy is companies and individuals who seek ways to circumvent sanctions and continue to be direct sponsors of the war in Ukraine.
Czech Republic. The missiles that killed 46 people (including 5 children) in Dnipro by hitting a high-rise building, 23 people (including 6 children) in Uman, and 11 Ukrainians in Kryvyi Rih (including 1 child) are X-22 and X-101 models manufactured by the Tactical Missile Arms Corporation. Its director, Borys Obnosov, owns real estate in Europe: two luxurious apartment buildings in the center of Prague, where his daughter and her family still live. As a result of the systematic work of the Ukrainian Security and Cooperation Center, in particular the USCC representative in the Czech Republic, Anastasia Signaevska, on August 16, the family of the Russian missile magnate was added to the Czech Republic’s sanctions list.
The Czech Republic also has a company called Versvet, which was involved in the import of electronics for the Russian company Radioautomatika, despite the fact that this Russian company is under sanctions. “According to the documents, Versvet is owned by a Russian citizen, and despite the sanctions imposed by the United States on May 19, 2023, it continues to operate and re-export electronic components for the Russian military-industrial complex in the center of Europe.
Danish company “RockWool”. Source: akm.kiev.ua
Denmark. “RockWool is a Danish company whose insulating materials were massively used to build Russian warships that are now firing on Ukraine. Explaining its decision to stay in Russia, Rockwool claims that it cares about the livelihoods of employees of its production facilities in Russia. Unfortunately, the company’s ethical principles do not apply to taxes to the terrorist’s budget. Moreover, the company is the largest taxpayer in the two regions of Russia where its plants are located.
Swedish technology company Ericsson. Source – Radio Liberty.
Sweden. The Swedish technology company Ericsson has legally withdrawn from the Russian market and announced the suspension of operations and deliveries to customers in Russia in accordance with the current EU sanctions. However, it turned out that the newly established Russian company Maxcomm declared to the Russian customs the intention to import 20 thousand Ericsson base stations for a total of $30-40 million. Such components are used in Leer-3 radio reconnaissance systems, namely in Orlan-10 UAVs, to intercept mobile communication signals and determine the location of a subscriber. Ukrainian servicemen report that they have already found base station chips in downed Eagles with manufacturer’s identifiers erased. They are also used to track traffic in the occupied territories to identify those involved in resistance to the occupation. Such information may indicate that Russia, through an “intermediary company,” is trying to import dual-use goods in parallel, using them for the war in Ukraine.
Equipment of the French concession and construction company Vinci. Source – So Chole
France. There are a number of other large European companies that, although not supplying critical equipment, continue to cooperate with the Russian government and conduct their business in Russia. In particular, the French concession and construction company Vinci, which has a subsidiary Eurovia in Russia and continues to build the Moscow-St. Petersburg highway. As of February 24, Eurovia did not terminate its contract with the Russian authorities until 2040 and did not leave the Russian market.
Microelectronics by Infineon Technologies. Source – Reuters
Germany. According to a study by the international Ermak-McFall expert group, up to 50 components in the downed missiles used by Russians to strike Ukrainian cities are microelectronics made in other countries. Germany ranks third on the list of these countries (16 companies). In particular, Infineon Technologies, a telecommunications chipmaker, and its subsidiary Cypress Semiconductor were suppliers of electronics found in the X-101 cruise missile, two modifications of the Iskander missiles that destroyed a pizzeria in the center of Kramatorsk, Donetsk region, on June 27, 2023 (8 dead and 60 wounded civilians, including 3 children), and the Kinzhal hypersonic missile.
HOW TO STOP RUSSIA FROM CIRCUMVENTING SANCTIONS
The societies of the sanctions coalition countries should understand that the restrictions imposed on Russia are not intended to worsen the socio-economic situation of its citizens (who, however, overwhelmingly support the war in Ukraine and do not resist the actions of the authorities). The sanctions are intended to stop Russia’s ability to arm and weaponize, and kill civilians in Ukraine.
The final solution to the issue of circumventing sanctions depends on the control and consistent decisions that governments must make with the support of their citizens who are aware of Russia’s actions on the territory of Ukraine.
- Control of re-exports. Companies whose products are subject to restrictions and could potentially end up in Russia must check their potential buyers for integrity. This will allow them to immediately identify fictitious “intermediary companies” created to circumvent sanctions and re-export goods through Russia.
- Export control. The new sanctions packages can and should limit the export of sanctioned goods by +10% to those countries that are found to be acting in favor of Russia’s interests, such as: Armenia, Kyrgyzstan, Kazakhstan, etc. The results of such actions are already noticeable after the introduction of the extreme sanctions package No. 11. For example, the authorities of Kazakhstan, which had previously denied re-exporting dual-use goods to Russia, openly admitted their actions after the exposure and stated that they would comply with all restrictions in order not to fall under secondary sanctions provided for by the 11th package.
- Control over the sanctions imposed on individuals. An obligatory element of sanctions against companies should be the parallel introduction of restrictions on their owners – individuals and their entourage – that will make it impossible to create offshore accounts and transfer profits. Enhanced control of this category of sanctions lists will stop such cases as the ownership of real estate by Russian missile corporations in the center of Europe.
- Transit control. Narrowing the categories of goods that can transit through Russia as much as possible. This will stop the importation of billions of dollars worth of “dual-use” goods into the aggressor’s territory, which will eventually remain in Russia without reaching their destination.
It is also necessary to impose sanctions against the Russian nuclear power industry and the Rosatom Corporation, which holds foreign contracts worth $200 billion. “Rosatom cooperates with NATO countries, Hungary, Turkey, and Slovakia, building nuclear infrastructure on their territory. The corporation is one of the leaders in exporting nuclear fuel to Europe, while operating the Russian-occupied Zaporizhzhia NPP in southern Ukraine and, together with the Russian regime, threatening the world with a nuclear catastrophe. So far, the company has avoided restrictions, partially because of its active involvement in civilian nuclear power around the world, including in Western Europe and the United States.
For Russia, the economy is just one of the means of warfare, which it uses not to build a democratic society or improve the socio-economic situation of Russians, but to kill and intimidate, waging a war of aggression in the center of Europe.
Using the money that Russia continues to receive from trade and economic ties, despite the sanctions, it is arming itself and continuing to destroy Ukraine and killing Ukrainians. The sooner we stop Russia’s ability to finance the war, the sooner we can end it and stabilize the situation in the Western world.