While the U.S. and EU politics are busy agreeing on the next wave of sanctions, the Russian government is working on replacing direct imports of Western goods via new trading routes and partners in China and other countries, thus circumventing the sanctions. Russia is pulling into this game the governments and economies of the Eurasian Economic Union (EEU), especially Kazakhstan, and Georgia, the country with the EU membership aspirations. In this context, one can expect a significant increase also in trade between Russia and Turkey and China.

Conscious of the scale of the planned bypassing of sanctions, on 21 April 2022, Russia's Federal Customs Service decided to stop publishing export and import statistics. The Service claims that the measure intends to "avoid incorrect assessments and speculations". In reality, it is one of the strategies to reduce the risk of secondary sanctions for countries that have turned out to be Russia's accomplices.

Moreover, by redirecting imports of Western goods via the Eurasian Economic Union (EEU) countries, Russia receives considerable financial gains to continue its belligerent conduct in Ukraine. Over 85% of revenues from customs fees in the Eurasian Economic Union end up in Russia's budget. Serving as hubs for Western imports to Russia, countries like Kazakhstan and Armenia risk becoming the targets of secondary sanctions and damaging their international reputation because of their involvement in financing genocide in Ukraine.

On 19 April 2022, the International Working Group on Russian Sanctions was established. It already has approved the action plan underscoring the need to ratchet up the international pressure on Russia's accomplices to prevent them from becoming vehicles for circumventing sanctions. The toolbox includes the U.S and the EU secondary sanctions targeted at countries continuing to help Russia wage war in Ukraine.

The West's response should be early, clear, and loud. Countries considering playing "the Russian roulette", most notably Kazakhstan, should be well aware of the risk of secondary sanctions. Also, the EU should send a clear signal to Georgia to warn of the negative consequences for its EU membership application should the country choose to assist Russia in circumventing sanctions.

Importantly, independent observers from the civil society should continue to identify the countries enticed in sanctions circumvention schemes and uncover Western exporters seeking to tweak their trading routes with Russia. Such companies are fully conscious of what they are doing. They understand their markets and are aware of participation in the war on the side of Russia.

Sanctions have started to bite. Direct trade has contracted, and traditional trading routes see the decay

At the moment, the European trading direction for Russia appears to be almost entirely paralyzed by sanctions and the termination of contracts. In addition, since 8 April, the EU countries have stopped allowing passage through their territories for vehicles registered in Russia and Belarus, essentially banning all cargo transportation, including transit. An exception is the transport of pharmaceuticals, medical goods, food, agricultural products, energy products, nonferrous metals, and fertilizer.

Major container shipping companies such as CMA, Sealand/Maersk, HMM and MSС have suspended cargo shipments and halted booking to and from Russia. However, bookings in the far East are accepted, for example, by Korean Sinokor, Chinese Huaxin, Jun An, and SITC. But they do not run services in Russia's ports situated in its European part. According to the shipping companies, vessels calling at Russian ports dropped by almost 40% in March. Traditional logistic routes have turned out to be unavailable.

By early April, over 430 foreign companies had halted their operations in the Russian market. The logistics sector, in general, had contracted. Direct shipment of goods included in the EU sanctions lists has stopped. It includes such goods as refrigerating and freezing equipment; pipes; machine units; spare parts for production equipment; motor tires; electronics; telecommunications; spare parts for aircraft, for sea vessels (including navigation equipment) and heavy-duty trucks (engines above 298 kW); vehicles (and their components) with cargo capacity above 90 tons and other goods. In addition, the EU has halted exports to Russia of all luxury goods.

Currently, the most significant demand in Russia is for the import of advanced technology items from Europe. Undoubtedly, the continuous struggle to import such items undermines Russian economic and military power.

Russia is responding by refocusing from the sea transport to the railways

The main share of cargo along sea routes in the European part of Russia is currently coming to Novorossiysk, where some foreign shipping companies continue to enter. As a result, only a few services are left and take new bookings, but both are overbooked. Regarding deep-sea shipping, the following situation is observed: in St. Petersburg, bookings have stopped on most services as there is a risk of stopping cargo in EU trans-shipment ports. There are options to send shipments to Kotka, Riga and Klaipeda designated for non-Russian recipients. Still, the subsequent processing of container shipments in these ports is handicapped by heavy congestion and some obstacles raised by the customs services.

In these conditions, Russian players renegotiate contracts with alternative partners – suppliers from the Eurasian Economic Union countries, South-East and Central Asia. In addition, logistics operators prepare infrastructure and re-arrange routes.

As a result, shipments are redirected toward railway transportation. In the first quarter of 2022, container deliveries through Russian railways already increased by 11.2% compared to the same period in 2021.

The container deficit currently constrains further acceleration of this mode of cargo transportation. For example, in the direction of China, the constraint is around one thousand containers per day. It is no more than two dozen of trains. The Russian container market is predicting the loss of capacity amounting to 300-500 thousand TEU or an estimated 37.5 to 66 per cent of the park. The loss is an effect of the significant international cargo companies gradually taking away the containers as they leave the country. Due to the same containers used, it is likely to affect cargo transportation within Russia eventually.

However, despite some temporary difficulties, the overall Russian strategy in this regard was highlighted on 13 April 2022. Speaking at the international conference for cargo owners and shipping companies, the top management of the Russian customs service noted: "10 years ago countries of the EU had the share of about 54% in Russia's foreign trade, and last year this share was 37-38%. All these years, China, countries of Southeast Asia and the Eurasian Economic Union and other neighbouring states, including Central Asia and the Trans-Caucasian region, have been ramping up their shares. Thus, the emphasis on shipping and movement of goods will be shifted towards the south, more actively exploiting the North-South corridor and Far East direction of the railway transportation from China and Southeast Asia. Special attention will be given to transit routes via Kazakhstan to China. In addition, the focus will be on the development of crossing points along the land Caucasian border and ramping up sea shipping, including via Novorossiysk and Black Sea ports."

Russia is expanding a 'parallel imports' scheme

The Russian government has authorized 'parallel import' of foreign goods, importing original goods through alternative channels. For example, high-end items are imported to Russia through exclusive distributors based in the Eurasian Economic Union. The Russian federal authority regulating industry and trade believes that any first sale of such goods to a country elsewhere in the world legalizes its further retail business in Russia.

It would be fair to say that all states that are members of the Eurasian Economic Union (excluding Belarus, which on 16 April 2022 imposed a ban on entry of vehicles registered in the EU), Georgia and Turkey will effectively become the countries availing unimpeded transit to Russia. It includes goods subject to sanctions and export bans and goods produced by companies that stopped their operations in Russia and imported their goods to Russia.

The statements of the political leadership of some of the mentioned countries support our analysis. Thus, Kazakhstan's Foreign Minister recently announced that the government would not join sanctions imposed on Russia. Georgia's Prime Minister ruled out the possibility of Tbilisi supporting Russian sanctions. Turkey has no intention to participate in exerting the sanction pressure on Russia, president Erdogan stated.

These countries not joining the sanctions levied by the U.S., the EU, and other states will significantly offset the intended effect of Western sanctions on Russia.

Russia is also getting considerable financial gain from trade routes via the Eurasian Economic Union. However, it is contrary to the interests of most member states in the Union, particularly Kazakhstan

According to the Treaty on the Eurasian Economic Union and amending protocols, the distribution of income from the rates for customs duty amounts for each member state is as follows:

  • Armenia – 1.220%
  • Belarus – 4.860%
  • Kazakhstan – 6.955%
  • Kyrgyzstan – 1.900%
  • Russia – 85.065%

Even though the import of goods may be declared in any member state, the Russian (also Belarus) state budget will benefit the most. Thus, over 90% of customs dues will go directly to the budgets of the aggressor-states. In contrast, the remaining 10% does not cover even the cost of administration for other members of the Eurasian Customs Union.

Russia and Belarus have involved other countries of the Union, essentially without asking them, in the war against Ukraine and genocide against the Ukrainian people. It will subject them to economic repercussions for years to come.

From the West's point of view, the leverage to ensure the effectiveness of sanctions will remain limited unless the extension of sanctions to third parties - particularly those in the Eurasian economic and customs Union. Therefore, subjecting them to secondary sanctions shall be immediate.

Essentially, the Eurasian Economic Union countries have very little time left to choose between long-term development and mere trickles of revenue coming with participation in the war against Ukraine. The choice of such a short-term perspective will ultimately become the choice against own people.

Looking to the long-term perspective, the very fact of waging war by one of the participants of the Union constitutes sufficient grounds for revising all pre-war agreements within the whole entity. Refraining from such revision would mean very conscious participation in the war not only against Ukraine but also against the global order and international law. Participation on the losing side.

Evidence from the countries concerned confirms the need for a swift policy response by the West

Growing demand is also noticeable vis-à-vis post-soviet countries that have not joined sanctions. For instance, the demand for shipments to Russia from Georgia has suddenly increased by 66%. Similarly, a 54% increase is on the route from Armenia to Russia. Besides, a new option is being considered regarding railway shipment to Russia via Turkey and Georgia – something that has not existed before.

It can be assumed that the main flow of goods from Europe to Russia will be going through Turkish companies that would close deals on European imports, simultaneously opening new procedures for exports to Russia. The number of applications in this direction has already increased by 125%. Russia will facilitate this by twisting its import rules.

Regarding Turkey, the country is receiving a lot of attention in Russia. It is viewed as a 'bridge of salvation' between Europe and Russia. If nothing changes from the Russian or Turkish side, this country could become a significant hub for shipments from Europe to Russia. Furthermore, Turkey is conveniently located from the logistics point of view and benefits from the relevant experience, having served for quite a while as a gateway for Western goods banned for export to Iran. The country has the right skillset for reloading and re-issuing documents on cargo forwarding companies.

Of course, Russia will eventually be trying to substitute Western produced equipment with solutions. But it will not be easy and cannot be entirely relied on. Russia understands that clearly. Its core strategy will be to buy China-manufactured goods from the EU and U.S. producers or buy such goods through Kazakhstan. As is the case with Turkey, Kazakhstan-based companies have experience being nominal importers of banned Western goods destined for import to Iran. Such schemes are well known not only to Turkish or Kazakh companies. Most producers know where and to whom they sell their goods. They issue certificates for end-users and understand well the regional and geographic dimensions shaping the demand for their produce.

On 3 March 2022, South Korea's ministry dealing with trade, industry, and energy announced that the restrictive export measures imposed by the U.S. towards Russia did not include cars, mobile phones, and other consumer electronics. Furthermore, restrictions are also not applicable when the end buyer is not a person affiliated with the defence sector.

It should be noted that already in 2021, the electronics producers Intel, Lenovo, Huawei, HP Inc., Vivo, Samsung, and Asus increased their reliance on shipments to Russia through Kazakhstan. It was because of the Russian FSB's delays in issuing special clearance certificates (related to exporting any electronic equipment that utilizes encryption to the Eurasian Economic Union territory). However, such a system did not imply the obligation to obtain special permits for the sale of computers and smartphones in Russia by these companies after obtaining authorization from any regulator within the Eurasian Economic Union. This scheme has not gone away with Western sanctions on trade with Russia.

Russian companies, citizens and affiliated persons will open subsidiaries in other countries (not only the ones mentioned in this article). These will be legal entities nominally unrelated and have "nothing to do" with the defence sector in Russia. It is already clearly observed that Russians are registering en masse with Kazakhstan authorities. Only in March, there was 14 times the number of applications submitted for issuance of ID number compared to the number presented in March 2021.

Kazakhstan is already turning into a hub since its main advantage has to do with logistics. Besides its geographic positioning, it is directly linked to Kazakhstan's participation in the Eurasian Economic Union, which allows it to perform customs clearance in Kazakhstan with further unimpeded delivery to any destination within the Russian Federation. According to analysts, since the start of the war in Ukraine, transit by trucks via Kazakhstan has increased 2.5 times and will continue to do so.

Furthermore, it is easy to open bank accounts in Kazakhstan, possibly transferring roubles from Russia and then converting them into U.S. dollars. The problem of hiding a money trail is also being solved. For example, a company buys equipment in Kazakhstan using bank credit. It then sells the goods to some foreign company. It pays for it using credit money. The equipment is then sold to some foreign (Russian) company and exported. Any remaining loans can be re-paid by Russian or other companies via re-assignment.

Authors: Maxim Mamchur, expert of the Kiev School of Public Administration, Piotr Kulpa, former deputy economy minister of Poland