As Western Russia-related sanctions snowballed after the Russian invasion of Ukraine’s Crimea in 2014 and especially after Russia’s full-scale invasion of Ukraine in late February 2022, Russian companies have invented various ways to circumvent the restrictions.
In their research paper Sanctions Policy Against Russia in 2014-2022: Gaps and Circumvention Schemes, analysts of the Kyiv-based NGO Trap Aggressor found 31 loopholes that the Russian government and businesses use to avoid Western sanctions.
Researchers Anastasia Khymychuk, Roman Steblivskyi, and Anna Pashkina of the Trap Aggressor NGO examined about 160 cases in which Russia managed to bypass Western sanctions. The research resulted in finding four weak points in the sanction policies that allow Russia to breach the restrictions:
- Gaps in sanction policies
- Selectivity of sanctions
- Multiple schemes utilized by Russia to bypass sanctions
- Cases of ignoring sanctions.
“The aim of this research is to single out and analyze gaps in the sanctions policy in regard to the Russian Federation, schemes to evade sanctions, as well as systematize the obtained results with the view to elaborating some recommendations on how to make the sanctions against Russian more effective,” the reports reads.
[quote]“Current policy is clearly failing to disrupt Moscow’s predatory plans,” Hlib Kanievskyi of Trap Aggressor argues in his article published by the Institute for War and Peace Reporting. Mr. Kanievskyi points out that “Western partners need to cooperate to limit Russia’s lucrative weapons trade with India, Türkiye, and other current customers.”[/quote]
Referring to Russian economists, Hlib Kanievskyi says that between 2011 and 2016 the scope of Russia’s defense industry grew by one-and-a-half times. Even in 2017, three years after sanctions were imposed, sales of Russian weapons were on the rise.
1. Gaps in sanction policies
Trap Aggressor’s research found the following loopholes which allow the Russian companies to bypass the Western sanctions:
- Maintaining projects launched before sanctions were imposed. For example, using this loophole, French companies sold €152 million worth of military equipment which “constituted 44% of the export of European weaponry to Russia.”
- Trading dual-use products. “German Bosch was convinced that it was selling automotive equipment solely for peaceful purposes, but its devices were found in the Russian infantry armored vehicles captured by the Ukrainian Army.”
- Continuing operations under sanctions claiming only partial control of a company. With sanctions looming, the Russia Bank transferred to its subsidiary company 2.5% of the controlling stake (51%) of the Sogaz insurance company to avoid having a controlling interest and thus not fall under sanctions.
- Lack of full lists of sanctioned activities. The US and the EU banned Western companies from helping Russia develop “shale reservoirs,” yet the ban didn’t extend to the so-called frontier or unconventional oil resources, which enabled Norwegian Statoil to help Rosneft to develop the latter.
- Discretion to interpret sanctions restrictions. Exxon Mobil’s subsidiaries signed contracts with sanctioned Rosneft chief Igor Sechin, later referring in court to the White House’s explanation that personal sanctions were aimed at identifying certain persons and freezing their assets rather than persecuting companies managed by them.
- Unawareness of sanctions violations as a valid excuse. The EU Council’s regulation dated 30 July 2014 has a provision under which in order to prove its innocence, a party may invoke the justification that it didn’t know and had no reasonable grounds to suspect that its actions would violate the sanctions.
2. Selectivity of sanctions
The analysts of Trap Aggressor found that the Western sanctions don’t apply to the following companies and activities:
- subsidiaries of sanctioned companies;
- “some key Russian companies in some economic sectors”: in 2014, the EU didn’t sanction Gazprom, the US — Sberbank;
- Russian smaller banks: with the largest banks sanctioned, 15 smaller banks continued their operations in occupied Crimea as of 2016. Later, the US sanctioned only a few of them;
- Leasing operations.
Also, according to the research, there is no ban on:
- port entrances for ships carrying Russian cargoes;
- trading debt or share capitals in secondary markets;
- financial operations in certain fields;
- supplying Russian energy resources to EU ports;
- culture-related projects, such as designing the Opera house in occupied Sevastopol.
3. Russia’s sanctions evasion schemes
Russia has been using every trick in the book to bypass Western restrictions. The schemes researched by Trap Aggressor include the attempts to hide the origin of products, the manufacturer, or the final destination. For example, Russian companies can change the flag or destination of the ship that transports their products, change the packaging of their products, or just smuggle those.
A Russian company with a sanctioned CEO may replace its boss with someone who currently hasn’t been under sanctions, like the CEO’s family member or friend. A sanctioned company may use offshore or sham companies to sell or buy products evading the restrictions.
Also, the Russian companies may conduct their business activities in jurisdictions where they aren’t under sanctions, and use third countries or their resident companies. Foreign companies may be doing business through local retailers in occupied Crimea, or just carry out business activities not directly but through their Russian subsidiaries.
4. Ignoring Sanctions
The report notes that sometimes companies don’t even resort to any ways of circumventing the sanctions but merely ignore them. For example, according to media reports,
- air defense systems manufacturer Ulyanovsk Mechanical Plant bought measuring equipment from German corporation Rohde & Schwarz;
- optoelectronic equipment producer Geofizika bought spare parts from the German company PFERD;
- the missile manufacturer Kirov Machine-Building company received equipment from the German Trumpf corporation and German-Japanese DMG Mori company.
Investigate Europe found that between 2015 and 2020, at least 10 EU member states
“exported a total of €346 million worth of arms to Russia. France, Germany, Italy, Austria, Bulgaria, Czech Republic, Croatia, Finland, Slovakia, and Spain – to different extents – have sold ‘military equipment’ to Russia.”
For instance, according to Investigate Europe, in 2016 and 2018, Bulgaria had two deals with Russia worth €16.5 mn to export special military and sea equipment, and the Czech Republic exported light aircraft, unmanned aerial vehicles, and air engines in 2015-2019.
- promoting a full embargo on business relations with Russia;
- enforcing a ban on dual-use goods supplies;
- recognizing the breaching of the sanctions regime as a crime at the level of the European Union.
“Putin will continue to have the resources to obtain deadly new weapons until the Western countries stop paying enormous amounts of money for oil, gas, and other goods. So weapons sanctions need to be accompanied with an energy embargo,” Hlib Kanievskyi adds in his article.
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