As the war in Ukraine enters its second year, compliance with economic sanctions against Russia is crucial: experts
As part of the latest round of sanctions imposed to mark the one-year anniversary of Russia’s invasion of Ukraine, US officials said they are pursuing companies and individuals that help Russia find backdoors to secure funding and restricted technology.
With several rounds of sanctions already in place, a former deputy energy minister in the Russian government says compliance monitoring needs to be stepped up if NATO allies are serious about restricting Russia’s ability to fund and wage the war.
“Most of the toughest sanctions have already been passed. The priority should be enforcement…which is weak at times,” said Vladimir Milov, who has lived in exile in Vilnius, Lithuania, since leaving Russia in 2021.
“Putin is circumventing the sanctions very effectively.”
New sanctions and export controls
On Friday, the US Treasury Department announced that it would introduce new sanctions against some of those accused of helping Russia circumvent previously imposed sanctions.
In addition to Russian and Russia-based companies, sanctions were imposed on Swiss and Germans.
The US Department of Commerce also announced export bans on US technology and goods to a number of companies outside Russia, including five Chinese and two Canadian companies.
The restrictions were put in place because of fears that products could be diverted to Russia, where they could eventually be used by the military.
CBC News spoke to two experts on the Russian sanctions regime who said third countries are helping Russia – and they pointed out that Turkey and the United Arab Emirates are among the culprits.
Earlier this month, a US Treasury official visited both countries to warn that they could lose access to G7 markets if they helped Russia’s defense sector bypass sanctions.
Turkey’s foreign minister said earlier this week that he does not sell products to Russia that could be used in its war effort.
Russia’s economy developed resilience
Milov, who has consulted with Western politicians on how to strengthen sanctions against Russia, was the country’s deputy energy minister in 2002. But since leaving government he has been a vocal critic of the Russian government and President Vladimir Putin.
The sanctions would never have the immediate impact some might have imagined, he said, and patience is key.
The Russian economy had developed some resilience by shifting to Asian markets and developing its own alternative to the international SWIFT payment system, which many Russian banks had not had access to since the early days of the war.
The surge in energy prices over the past year helped cushion the blow of sanctions, and Milov said Russia has been able to shuffle some of its banned resources, including coal, which was subject to a European Union import ban last August export product with coal from Kazakhstan and export from there as Kazakhstan coal.
“These machinations are not very easy to understand,” he said in an interview this week before the new sanctions were announced.
“There are many [EU] Officials involved in the actual drafting of the sanctions and their enactment. But I just don’t see people … in Brussels tracking all these transactions and saying, ‘No, this supply chain has to stop.’”
As a former bureaucrat, Milov said he understands the complications of hiring hundreds of additional staff dedicated to fighting sanctions evasion, but that it is necessary to bolster measures already in place.
“I think right now we’re trying to close the loopholes of the existing sanctions,” said Maria Shagina, senior fellow in Berlin at the London-based International Institute for Strategic Studies, who has been studying the effectiveness of sanctions against Russia since 2014, when it annexed Crimea.
Overall, the sanctions are starting to work, she said, but she believes Russia’s oil industry should have been hit sooner and can be hit even harder.
CLOCK | Effects of sanctions on Russia are beginning to show, say experts:
In December, an EU embargo on seaborne crude oil shipments came into effect, along with a price cap of $60 a barrel, costing the Kremlin €160 million a day, Shagina said. She said the cap could be lowered further, even to $30 a barrel.
While the oil and gas industry is the “money cow” of Russia’s budget, Shagina said other sectors have not yet been targeted by Western sanctions, such as Russia’s diamond industry and nuclear sector.
Consumer vs Military
Shagina said Western officials are keen to make the sanctions more effective – and one of the hardest areas to navigate is the blurred space around civilian assets that could be repurposed.
“How many civilian microchips…can be repurposed for military use?” she said in an interview.
With civilian drones being diverted from Chinese companies to Russian companies, consumer goods could find their way onto Ukraine’s battlefield, she said.
German news magazine Der Spiegel reported this week that Russia is in talks with a Chinese manufacturer to buy 100 drones.
China’s foreign ministry says no talks are known.
Shagina said the sanctions regime was designed using the “smart sanctions” approach, meaning anything purely civilian should not be collateral damage. But many Western brands have voluntarily withdrawn or restricted their business in Russia in the past year.
Companies are leaving, but some brands are staying
According to Yale University, more than 1,000 Western companies have voluntarily scaled back operations in Russia since last February — but that doesn’t mean their products have disappeared from Russian shelves.
A number of Western brands have sold or transferred their assets to other companies, which continue to import and sell their products in Russia.
Sneaker and sportswear maker Reebok has signed a deal with a Turkish company to buy more than 100 of its retail stores in Russia. The outlets have now been renamed Sneakerbox and sell Reebok products.
About a month after Russia’s invasion of Ukraine, Muscovite Konstantin Rozhkov launched a YouTube channel exploring the impact of Western sanctions and corporate withdrawals.
“Things are not as bad as we initially thought,” Rozhkov said in an interview with CBC News.
“It’s hard for me to find a single brand that I can’t buy in Russia at the moment. Even Apple – I can just buy Apple.”
The right to sell the products has either been transferred to new brands or they make their way to Russia via the country’s parallel import system, which was introduced in March 2022 to protect consumers from the closure of Western stores.
The system allows Russian companies to import selected foreign products originally destined for countries near Russia and resell them without the brand owner’s permission. This applies to a range of products across dozens of industries, including automotive, electronics and apparel.
In August, Russia’s Trade and Industry Minister estimated that products imported into the country through parallel imports would reach $16 billion by the end of the year.
Military Exports
While ubiquitous Western goods on Russian shelves could undermine the companies’ retreat, Western pressure remains focused on stumbling Russia’s war machine, and Milov said it’s working.
Putin “has only been able to increase the Russian military budget by about 30 to 40 percent annually,” he said. “But what he needs is a doubling or tripling to actually have sufficient funds to fund this full-scale war.”
Milov said Russia has no money because of the oil and gas sanctions.
Earlier this month, Russia’s Treasury Ministry said its revenue from the energy sector fell 46 percent year-on-year.
To put even more pressure on the Kremlin, according to Milov, Western politicians should also increase the pressure on countries that buy weapons and weapon systems from Russia.
He said Russia makes between $10 billion and $15 billion annually from arms sales to countries including India, Vietnam and Egypt.
“We need more long-term Russian arms procurement contracts that need to be terminated,” Milov said.
“Listen, folks, you’re giving Putin the highest dollar or helping him direct this aggression… You have to stop.”
