30.11.23 Sanctions Review

Dancing around Sanctions: The EU is finding it increasingly difficult to impose new restrictions as the old ones are not working

The EU's 12th package of sanctions against Russia was announced a month ago, but has yet to be implemented. The arsenal of direct restrictions that the EU could impose without inflicting harm on itself has largely been exhausted. According to the media, the new measures are being resisted not only by Hungary or Slovakia. The largest and oldest members of the EU are also seeking to place clauses into the new sanctions that will protect their economies. The new sanctions harm Western economic agents (including bona fide ones) and increase the competitiveness of companies from the Global South, but they do not have the intended effect of undermining the Kremlin's ability to wage war. Moreover, the mechanisms against grey imports developed during the EU's 11th package of sanctions have not been working. Despite the fact that dual-use goods are almost openly supplied to Russia by Turkey and former Soviet republics, strict restrictions have not been applied to these countries. In addition, more and more 'grey' imports to Russia are being routed through China and southwest Asia. The problem lies not so much with the new mechanisms as with the ability to implement them. Here, the sanctions coalition will likely have to find new forms, relying not so much on direct political pressure, but on measures that increase the costs of grey imports.

Speaking in the Verkhovna Rada of Ukraine on 4 November, the head of the European Commission, Ursula von der Leyen, promised to adopt the 12th package of EU sanctions against Russia next week and announced new restrictions on Russian exports (including energy resources) and imports, increased pressure on third countries via which banned goods are continuing to enter Russia, as well as individual sanctions against more than 100 individuals and organisations. 

Subsequently, details about the alleged sanctions innovations began to leak out. Bloomberg reported that the EU wants to impose a ban on the sale of old tankers to Russia, with which it is continuing to replenish its shadow fleet. According to the agency, from 1 January an embargo is being proposed on direct imports of Russian diamonds, and following this, restrictions should also be expanded to diamonds from Russia processed in third countries. Russian liquefied propane and butane, copper and aluminium wire, foil, and the list of goods that cannot be supplied to Russia may be expanded to include lithium batteries, thermostats and components for drones.

The second part of the package involves additional measures to control compliance with the restrictions already imposed. Importers of semiconductors and other dual-use goods may be obliged to independently ensure that their products do not end up in Russia. At the same time, they will have to set aside insurance amounts on special accounts, from which fines will be paid into a fund to help Ukraine in the event that violations are detected. European companies owned by Russians may be required to obtain authorisation to withdraw funds from the EU. There are other measures in the 12th sanctions package, but they appear to be less significant. For example, Russian citizens will be banned from holding executive positions in crypto-industry companies. 

However, four weeks after its announcement, the 12th package has still not been implemented. Currently, there are several versions of events circulating. According to the Financial Times, the stumbling block could be a ban on Russian diamond exports. Before the war, Belgium accounted for more than half of these. However, even without sanctions, direct deliveries following the full-scale invasion have decreased significantly: while in 2021 Belgium imported €1.8 billion worth of diamonds from Russia, in 2022 it imported only €1.4 billion, and in the first half of 2023 this dropped to less than €300 million. On 28 November, news broke that the European Commission had finally approved this measure.

According to Politico, Slovakia and Hungary may block the adoption of the 12th package of sanctions. Two European diplomats told the publication that Slovakia is seeking to be able to continue buying Russian oil, which is refined by Slovnaft, a company owned by Hungarian state-owned MOL. And Hungary, without waiting to discuss the topic, has warned that it will block any sanctions if they affect nuclear energy. Finally, Bloomberg sources have revealed that a number of major EU countries have expressed doubts that importers of dual-use products should be held responsible for complying with sanctions (and even more about the prospect of creating insurance funds in case they are breached) because it would impact their competitiveness. 

Before the 12th package was announced, experts from the Economic Security Council of Ukraine suggested that the EU should lower the price cap on Russian oil; completely block cooperation between European companies and Russian companies in the field of raw materials extraction; impose sanctions against all Russian companies that are indirectly linked to the military-industrial complex, including Rosatom and Almaz-Antey, as well as against large taxpayers; and completely disconnect Russian banks from the European financial system.

However, all these proposals have been met with some objection as a result of the fact that their introduction would impact the economies of Western countries, and that this is not any guaranteed that the sanctions policy will be effective: the cap has not been working as intended and other exports will be diverted to the markets of countries that have not joined the sanctions coalition. Sanctions restrictions do not have the desired effect, but they do worsen the market position of Western firms and increase the competitiveness of companies from the Global South.

The previous, 11th sanctions package, adopted at the end of June, was supposed to be mainly devoted to measures against non-compliant countries and companies. However, in the final version of this package, these measures were adopted with significant caveats. For example, a mechanism was developed that allows for the prohibition of the export of prohibited goods to third countries if there are reasons to believe that they then end up in Russia. A sharp increase in imports, which cannot be explained by other reasons, was supposed to be a reason for the implementation of such a ban. However, the final wording indicated that stopping exports was an extreme measure, and should only be a final resort. To date, this extreme measure has never been applied.

As a result, according to Financial Times calculations, Turkey, for example, supplied Russia and its neighbours with $158 million worth of dual-use products (we are talking about goods like microchips, etc. from 45 categories that the US calls 'high-priority') in the first nine months of 2023. This is three times more than in the same period in 2022. The experts interviewed by the Financial Times are convinced that almost all of these products ended up in Russia. They also highlighted discrepancies in the customs data of various other countries. For example, Turkey, according to its data, supplied Kazakhstan with $66 million worth of 'high-priority' goods, but Kazakhstan documented receiving only $6.1 million worth of products. Evidently, $60 million worth of products went directly to Russia. 

Customs data reviewed by the Financial Times and Bloomberg, however, show that shipments of dual-use goods to Turkey, as well as Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan and Uzbekistan, began to decline in the second half of 2023, apparently as a result of Western pressure. However, according to Bloomberg, Russia is now receiving more than 80% of banned products via China and Hong Kong. Russia is also establishing new routes, for example, through Malaysia and Thailand, but putting pressure on these countries is much more difficult for the West.

The problem, therefore, is not only what measures will be in the 12th sanctions package, but rather how enforceable they will be and how to implement the decisions that have been made. Direct political pressure is unlikely to achieve results. Instead, the West should focus on ways to raise the costs of circumventing sanctions.