31.05.23 Sanctions Review

The West intends to continue its fight, threatening to inflict new problems on the Russian economy in the near future

Western sanctions have so far failed to halt parallel imports into Russia, including electronics needed for the production of high-precision missiles, consumer goods, and intermediate products used for military purposes. 'Shell' companies, 'fake' transit routes, and a tract of new trading 'friends' along Russia's southern borders have helped Russian businesses cope with a multitude of sanction-related issues. However, the United States and its allies are determined to fight to increase the effectiveness of their sanctions and are developing new measures to exert control and pressure. Even if these measures are not fully successful, they will have a significant effect and will create new logistical costs for Russia, further reducing the already low competitiveness of Russian industry.

The West is fighting to increase its sanctions. In its latest review of its sanctions monitor, the Atlantic Council’s analytical centre underscores that the goal of the new measures and restrictions is to make those that have previously been adopted more effective. The new restrictive initiatives consist, first, of targeted measures against individuals and organisations in Russia and third countries, including those in the West, which assist in procuring dual-use products for military purposes or bypassing existing restrictions, and second, in they strengthen export controls.

Ahead of the G7 summit in Hiroshima, the United States imposed new export restrictions and measures against several dozen entities and individuals from different countries (Finland, Switzerland, Cyprus, UAE, India, and Singapore). At the same time, the United Kingdom imposed sanctions on 86 individuals and organisations. The forthcoming 11th sanctions package from Europe is expected to affect several Chinese companies for the first time. European countries intend to finalise this package by the end of June.

While the general consensus is that sanctions are working poorly, both Russian businesses and the government have managed to find ways to 'sew up the loopholes' by establishing new channels for parallel and alternative imports, as well as organising uncontrolled and opaque export channels.

At the same time, tightening export controls over supplies entering Russia is not that simple. Russia has managed to establish imports through its neighbours in Central Asia and the Caucasus, as well as via Turkey. According to experts at the Atlantic Council, imports of electronic equipment into Russia increased from $304 million in 2021 to $1.12 billion in 2022. Armenia remains one of the main transit points (exporting $462 million worth of electronic products to Russia in 2022, compared to $12 million in 2021), followed by Turkey ($559 million compared to $254 million in 2021). Nikkei Asia has also discovered that Chinese intermediary firms, which themselves obtain products from American companies through third parties, are shipping chips and microchips from leading manufacturers such as Intel, AMD, and Texas Instruments to Russia in large quantities. While sanctions could be imposed on these firms, this would be unlikely to block the shipments altogether as new companies would simply emerge in the supply chain.

Shell companies and 'lost' transit cargoes, which are transported through Russia to Central Asia or the Caucasus but do not reach their final destinations, pose a significant problem for the sanctioning coalition. There have even been proposals to ban transit through Russia altogether. However, Russian businesses are confident that the schemes involving 'shells' cannot be shut down altogether.

Nevertheless, Western countries, especially the United States, continue to seek ways to block circumvention channels more reliably. According to new guidelines from the US Department of Commerce and the Department of the Treasury, financial institutions must report signs of export control violations by their clients. These signs include, for example, payments for dual-use goods to companies registered in countries that have not imposed sanctions on Russia or a refusal to disclose the ultimate recipient of the exported products. Moreover, as the Atlantic Council reports, the US and its allies should persuade Russia's neighbours — Armenia, Georgia, Kazakhstan, Kyrgyzstan, and Turkey — to be less formal in their compliance with sanctions and to report publicly on the results, which they are not currently doing.

It is likely that we will soon witness this type of pressure, and it will yield certain results, albeit perhaps not with a hundred percent effectiveness. Further, the instrument for this pressure is likely to be the banking sector itself. As noted by 'Kommersant,' on the eve of the presidential elections in Turkey, transaction processing times at Turkish banks have increased sharply, and in general, the business community is confident that the Turkish channel for the delivery of European goods will cease to function sooner or later.

The existing practices of sanction regimes, up until now, have not been designed to control broad sanctions against an economy as large as Russia's, with a GDP per capita above the global average and significant current export revenues. However, Western persistence may lead to significant changes in the control and transparency of global trade. Even if it does not achieve complete success, it will further increase the logistical costs and the cost of Russian imports. This, in turn, will lead to a further decline in the competitiveness of Russian producers, who are already suffering from relatively high labour costs and technological backwardness.