Closing the "backdoor": how to prevent Russia from circumventing sanctions

If they don't let us in through the front door, then we will climb through the window. If it is not possible to climb through the window, we will make our way through the chimney. If we do not manage to make our way even through the chimney, we will get to where we need to go through a trench dug in the ground.

In this way, Russia is trying to bypass the international community's price limit on Russian oil and sanctions on a number of goods that it can use for military purposes. After all, in order to continue the war and win it, Russia needs the money that the Kremlin receives from the sale of oil and gas. In addition, modern chips and semiconductors are also needed, without which it is impossible to create airplanes and drones, missiles and targeting systems, radio stations and means of electronic warfare.

Today, the Russian authorities are building a "shadow fleet" and using GPS spoofing to bypass restrictive measures and sell their oil at a price higher than $60 per barrel. Also, the aggressor country comes up with alternative schemes for carrying out calculations. In addition, the Russian Federation uses parallel imports and creates shell companies for the supply of sanctioned goods. It also actively imports irons, dishwashers, and washing machines: household appliances are disassembled, and the resulting components are used to equip weapons.

In part, Moscow succeeds in its fraud. This is evidenced by the fact that, according to the Bloomberg agency, Russian imports in general have largely returned to the level of 2020.

The methods used by Russia are not new. Previously, they were actively used by other countries that were subject to international sanctions. In particular, Iran.

At the same time, products of even American and British companies end up in Russia. Director of the Independent Anti-Corruption Commission Olena Tregub reported at one of the discussions at the Atlantic Council that many companies (mostly American) sell products to Russia through official distributors in Hong Kong and Turkey. (For more information on the schemes used by the Russians to circumvent sanctions, see Dmitry Mendeleev's article "How to End Russian Missile Terror".)

In the last year, there has been a rapid increase in Russia's trade with countries that have not joined the international sanctions against it, such as Armenia, Georgia, Kazakhstan, China, Kyrgyzstan, Uzbekistan, Turkey, the UAE, and others. Although these countries deny that they help Moscow circumvent the embargo, semiconductors and microchips account for a significant amount of their trade with the Russian Federation. This helped Russia boost its total chip imports to $2.45 billion in 2022, up from $1.82 billion in 2021.

For example, in 2022, deliveries from the United Arab Emirates (UAE) to Russia of electronics and parts for it have already increased by 100% and amount to 283 million dollars. And such an increase in supplies occurs despite the fact that the entire volume of exports from the UAE to the Russian Federation is equal to 500 million. In addition, the supply of microchips increased by 15 times, namely to the amount of 24 million dollars. The same situation is happening with the countries of the former USSR, which have become a "backdoor" for Russia for parallel imports.

The company Euromonitor International notes that last year the main increase in exports from the EU to these countries was precisely for goods that fell under anti-Russian sanctions, and amounted to 95%. Does anyone think that domestic consumption of these products just suddenly increased in these countries? According to the Bloomberg agency, Kazakhstan exported $3.7 million worth of modern semiconductors to Russia in 2022 alone, while a year before the invasion, this figure was only $12,000 (!)

It is not surprising that Armenia, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan were included in the list of states prepared by the US Treasury Department that help Russia circumvent sanctions.

In addition, the supply of semiconductors and integrated circuits from China to Russia increased last year.

If from March to September 2021, the PRC supplied the Russian Federation with semiconductors worth $200 million, then during the same period last year, supplies increased by more than $500 million. If in 2021 the Chinese exported integrated circuits worth $74 million, then in 2022 exports have already increased by 179 million. Last year, the supply of Chinese chips and related components to Turkey also increased sharply, and at the same time, the supply of similar semiconductor microcircuits from Turkey to Russia also increased.

"In the last year, there has been a steady trend of increasing Chinese microcircuits and their components in Russian armaments instead of Western ones. In particular, if earlier the Russian drone called "Orlan" used Swiss GPS, now, after the restrictions adopted by the EU, this drone already uses Chinese ones. It is not surprising that Russians pay more attention to household appliances: almost all of them can be adapted for Russia's military needs," Vladyslav Vlasyuk, adviser to the office of the President of Ukraine, said in a comment to ZN.UA.

At the same time, it is impossible to completely stop the supply of household appliances: in the West, they talk about the inadmissibility of the suffering of ordinary Russians. "However, it can be proven that components of household appliances are used for military purposes (that's exactly what we do). And then sanctions will be imposed," says Vladyslav Vlasyuk.

Russia has been stockpiling high-tech components since 2014 and is now using them to replenish its stockpile. But now it mostly can't buy anything directly from the supplier. Therefore, the Russians import microcircuits secretly. However, they cannot do this in large volumes and look for loopholes in the sanctions regime using shell companies. For example, as in the case of a British company registered in London called Mykines Corporation.

Since February 2022, this company has sold to the Russian Federation semiconductors, servers, laptops, computer components, telecommunication network equipment and consumer electronics from Huawei and H3C to Intel, AMD, Apple and Samsung in the amount of about 1.2 billion dollars. As the Financial Times emphasizes, at least $982 million worth of goods are subject to restrictions on exports by British companies or individuals to Russia.

In order to block the channels of circumvention of sanctions by the Russians, it is not enough to implement an export ban on a number of goods. Control over the implementation of sanctions against Russia, and forcing other countries to comply with restrictive measures, and constant clarification of problematic issues and gaps in the sanctions regime are necessary. For example, the serial numbers of the components of various goods can be used to trace the supply chain of products to Russia. After that, according to V. Vlasyuk, first of all, the relevant companies are included in the sanctions lists. Secondly, sectoral sanctions are adopted.

At the end of February this year, the G7 countries agreed to create a mechanism for coordinating the application of sanctions against Russia. It is assumed that a new mechanism will be developed that will allow its participants to exchange information and coordinate their actions regarding third countries and companies that will be seen to be helping Russia circumvent the restrictive measures. It is expected that this coordination mechanism will be created in the near future.

Recently, the head of the European Commission, Ursula von der Leyen, said that the 11th package of EU sanctions against Russia will include measures against the circumvention of existing restrictions. This issue will be considered in the European Union, roughly, in April.

In its turn, Ukraine provides its Western partners with information about the circumvention of sanctions, as well as about the detected components of Western electronics in samples of Russian weapons obtained in battles. However, these measures are not enough to break the chain of import of components to the Russian Federation, and therefore the actions of the authorities are criticized. In the above-mentioned article "How to end Russian missile terror", Dmytro Mendeleev proposed to create a system of prevention and control of deliveries of critical imports to Russia, the main aspect of which should be an electronic register of technologies, products, works, equipment, materials and raw materials for the production of missile weapons and military equipment.

In Kyiv, the authorities understand that completely stopping the circumvention of sanctions is not an easy task. As Vladyslav Vlasyuk noted in a conversation with ZN.UA: "If it is impossible to completely ban the supply of goods, then the task is for the Russians to pay the highest possible price for the goods, receiving as little as possible and of the worst quality."

Parallel import schemes are beneficial to intermediary countries. And the policy of shaming, that is, social condemnation of companies that violate sanctions, is not always effective. However, unlike the political and economic arguments of the United States of America, Ukraine's opportunities to stop the arrival of sanctioned goods to Russia through third countries are small. Washington is actively using its persuasive arguments to stop the arrival of sanctioned goods to Russia: in recent months, delegations of high-ranking employees of the Biden administration have visited countries that are reasonably suspected of supplying sanctioned goods to Russia.

The United States of America operates on two levels. The first is diplomatic work with the governments of countries that are suspected of participating in parallel imports to Russia: Ukraine, the USA, and the EU expect other countries to comply with sanctions. Why should some countries suffer financial losses, while others should profit from the blood of Ukrainians? The second is a dialogue between representatives of the Biden administration and Turkish, Kazakh and other companies.

The main argument: countries that have become channels for parallel imports or settlements are more dependent on the global market than on the Russian one. In addition, companies that have come under American or European sanctions due to the violation of restrictive measures against Russia, the possibility of working in other countries will practically disappear. This is an exorbitant price for the risk. After all, the same UAE is much more dependent on the USA and other Western countries than on the Russian Federation and Iran.

And, as evidenced by the results of US Secretary of State Anthony Blinken's trips to Turkey and the countries of Central Asia, this approach works anyway.

Thus, at the beginning of March, the Turkish authorities blocked the transit from the EU to Russia of goods that were subject to international sanctions. The ban applies to about 10,000 items of goods, including electronics, spare parts, chemicals, and industrial equipment. The Turkish government also distributed among companies a list of goods that were subject to sanctions and prohibited for transit to Russia from March 1. In turn, Kazakhstan introduced a monitoring system for goods exported to Russia on April 1 in order to prevent the circumvention of sanctions.

Countries are gradually strengthening control over the banking operations of Russian clients. In particular, banks in Armenia will block transfers from Russians if they consider them risky. "Western commercial banks, especially in the USA, are now revising their transaction control system in connection with sanctions against the Russian Federation, which significantly complicates the conditions for foreign transactions of all banks in the region, including banks of Armenia," the Central Bank of the Republic reported.

Beijing also has to consider the consequences of non-compliance with sanctions. According to the director-general of the European Department of the Chinese Ministry of Foreign Affairs, Wang Lutong, China does not intend to take any special steps to circumvent Western anti-Russian sanctions. However, at the same time, Beijing will continue to develop normal trade relations with the Russian Federation and other countries: the Chinese diplomat noted that "China's normal economic cooperation with other countries should not be affected", because Europe also continues to trade with Russia, therefore sanctions "should not apply to normal trade relations between China and Moscow".

There will always be gaps even in a tightly packed "backdoor". The main thing is that with the lenient attitude of governments to the circumvention of sanctions by local companies, they do not turn into black holes. After all, every chip and semiconductor brought to Russia, every washing machine delivered to an aggressor country means that the Russians have a missile that can kill a Ukrainian child, and high-tech equipment for helicopters or tanks that will kill our soldiers.