Brussels, Beijing, Berlin A year ago, when the Russian invading army had already deployed on the borders of Ukraine, EU Commission chief Ursula von der Leyen sent a warning to Moscow. Should Russia invade the neighboring country, von der Leyen said in an interview with the Handelsblatt, the Europeans would enact trade penalties in close coordination with the USA, ranging from “cutting off access to foreign capital to export controls, especially technical goods”. These punitive measures would “make the Russian economy even more fragile”.
Since then, the EU has put nine sanctions packages into effect – and the tenth is in the works. But the Russian economy is surprisingly resilient. After a 2.2 percent slump last year, the International Monetary Fund (IMF) expects the Russian economy to record slight growth in 2023. With a forecast increase of 0.3 percent, according to IMF calculations, Russia is in even better shape than Germany, whose economy is only likely to grow by 0.1 percent.
how come One reason is that Russia has managed to establish new trade links. “Russia is actively circumventing our sanctions,” EU Commission Vice President Valdis Dombrovskis recently admitted.
Data supports this: Russian imports from the EU fell from eight billion dollars in January 2022 to five billion dollars in November 2022. On the other hand, Russian imports from China, India and other Asian countries increased significantly. Imports from China, for example, grew from $7.7 billion to $10.5 billion in the period, those from India from $1.1 billion to $4.6 billion.
>> Read here: “Make the Russian economy even more fragile” – EU wants to stop Moscow with capital freezes and tech embargo
This does not mean that the sanctions are ineffective. “The Russian defense industry has stopped, reduced or downgraded the production of several high-tech weapons systems because the sanctions have restricted their access to the necessary technology,” the German Council on Foreign Relations (DGAP) sums up in a recent study.
And the oil price cap that the G7 countries imposed at the turn of the year is reducing Russia’s trading income.
But Western hopes that the Russian troops would run out of supplies have not been fulfilled. “Russia is adapting, turning its economy into a war economy, ramping up military production and adapting to the sanctions,” the DGAP study continues.
Neighboring countries are helping the Kremlin to circumvent the sanctions
A number of neighboring countries are helping the Russians in this. They have apparently discovered a lucrative business: their companies buy Western goods and sell them on to Russia, which is ostracized by the West.
Such an intermediate trade can be observed in Turkey or Armenia, for example, says Tobias Gehrke from the European Council on Foreign Relations (ECFR) think tank. “All of a sudden these countries are exporting things that they don’t even produce themselves.”
The diversion of trade helps the Kremlin keep its war machine running. The Russian army has suffered heavy casualties in Ukraine, but it continues to send people and materiel to the front lines. “The Russians rely on mass, they have enormous reserves,” says a Western diplomat.
>> Read here: Why Russia now has to sell off its oil
Kazakhstan has developed into an important hub for circumventing sanctions. The country “is selling eighteen times as many microchips to Russia as it was a year ago,” Peter Piatetsky, head of US data provider Castellum.AI, said recently at an event organized by the US organization Atlantic Council.
“There is only one explanation for this: deliveries that used to go to Russia are now going to Kazakhstan, from where they are resold.” A common border helps here. “It’s a lot easier to avoid checks if you don’t have to reload the goods onto a plane.”
How refrigerators strengthen Russian armor
Western intelligence services are concerned. It is striking that Kazakhstan delivered an above-average number of refrigerators to Russia last year, several secret service agents familiar with the subject told the Handelsblatt. The devices had previously been delivered to Kazakhstan from the EU. The observation of the secret services coincides with figures from the statistics agency Eurostat.
In the first eight months of 2022, Kazakhstan imported $21.4 million worth of refrigerators from Europe — more than triple the same period last year. A similar picture emerges for Armenia: from January to August 2022, the country imported more washing machines from the EU than in the past two years combined.
Many of the devices apparently end up in Russia. This is suggested by data from the Kazakh government, which the business medium Bloomberg reported in October 2022. Accordingly, the export of refrigerators, washing machines and electric breast pumps to Russia has increased “by leaps and bounds”.
The EU has no doubt that Russia uses chips from such simple household appliances for military equipment. Commission chief von der Leyen said as early as September: “The Russian military takes chips from dishwashers and refrigerators to repair military equipment because they have run out of semiconductors.”
EU appoints sanctions officer
At the end of 2022, the EU Commission appointed a sanctions officer to counteract the circumvention: the former EU ambassador David O’Sullivan is supposed to persuade third countries to tighten their controls. So far this hasn’t been very successful. Only 34 countries have imposed sweeping sanctions on Russia since the war began, including 27 EU countries.
Emerging countries like India and South Africa sometimes criticize the western sanctions more harshly than the Russian war of aggression. For its part, Russia is lifting trade barriers to promote exchanges with these countries. India in particular is benefiting from this, as a high-ranking diplomat explains.
The main problem with sanctions control is the dual-use character, i.e. the civilian and military usability of many imports. Semiconductors, which are urgently needed for modern military technology, can also be found in household appliances. An analysis by the Institute for International Finance (IIF) concludes that Russia has managed to “successfully redirect its trade via China and other countries.”
Despite the sanctions, Moscow has managed to increase its imports of semiconductors and electronic circuits. The IIF analysts write that chip imports between January and September rose to 2.45 billion dollars compared to 1.8 billion dollars in the same period last year.
The value of chip imports from China and Hong Kong has more than doubled. Overall, these cover 40 percent of Russia’s needs. However, the authors limit that it is unclear whether all chips are subject to the sanctions.
Does China supply war-critical components?
China also supplies Russia with other dual-use goods, as recently reported by the Wall Street Journal, citing an analysis by US think tank C4ADS. According to this, state-owned Chinese defense contractors are said to have supplied navigation devices, jammers and parts for fighter jets to sanctioned Russian defense contractors, some through subsidiaries or intermediaries in Uzbekistan and the United Arab Emirates.
Does China also supply Russia with wartime components?
(Photo: IMAGO/ITAR-TASS)
According to the report, Russian defense company JSC Rosoboronexport has received navigation equipment and telescopic antennas for military helicopters and vehicles from Chinese companies Poly Technologies and Fujian Nanan Baofeng Electronic. The aircraft manufacturer Avic International is also said to have supplied parts for the Russian SU-35 fighter jet to a subsidiary of the sanctioned state-owned company Rostec.
China’s government has denied allegations that it is providing military support to Russia. But that is difficult to control. The trading partners are not dependent on global logistics centers and freight forwarders and can process payments in Chinese currency, explains the Russian China expert Alexander Gabuev. Beijing is careful not to “supply ready-made weapons” to Russia.
But there was already military-technical cooperation between China and Russia before the war and it is unlikely that the West will be able to stop it. The worse the relationship between China and the US becomes, “the less incentive” there is for China to restrict trade with Russia.
NATO member Turkey is also said to have supplied sanctioned Russian companies
Turkey is also said to have supplied sanctioned Russian companies. At the beginning of the month, the Cologne public prosecutor’s office had business premises in the Rhein-Erft district searched. Smart Impex GmbH is suspected of having sold electronic components to Russia via a company in Turkey, which can also be used for military purposes. Smart Impex told “Monitor” that it was examining the allegations and had not found any violations so far.
The EU now wants to further tighten export controls. The tenth package of sanctions is primarily aimed at dual-use goods. Specifically: electronic components for drones, helicopters and guided missiles as well as circuit boards and cameras.
But the fundamental problem that Russia can direct trade flows through other countries remains.
ECFR expert Gehrke says that detecting the smuggling of dual-use goods requires intelligence capacity in the countries concerned. The EU is dependent on the Americans here. In addition, it takes political will to stop intermediate trade – and here both the USA and the EU are hesitant in order not to drive countries like India and Turkey into the arms of Russia.
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