Related News

Ukreximbank lands EBRD risk-sharing deal

Marsh announces major expansion of Ukraine export insurance initiative

Sace and Nexi vouch support for Ukraine

Kazakh bank hits snag in fraud suit against commodity traders

Authorities urged to target refineries as Russian-origin fuel imports soar

Exports from Europe and the US to countries in a customs union with Russia soared by around US$1bn after sanctions were imposed on Moscow a year ago, suggesting Central Asia and the Caucasus have become conduits for sanctions evasion.

Trade data from 2017 to August 2022, analysed by the European Bank for Reconstruction and Development (EBRD), shows that exports to Russia from the US, EU and UK plummeted following the wave of sanctions triggered by the nation’s invasion of Ukraine in February 2022.

At the same time, exports from the US, EU and UK to Armenia, Kazakhstan and Kyrgyzstan saw a dramatic increase, including in sanctioned products or similar items, the research shows.

Armenia, Kazakhstan and Kyrgyzstan are all members of the Eurasian Customs Union (ECU), alongside Russia and Belarus. The arrangement allows for movements of goods with minimal border checks.

The EBRD also noted a sharp increase in exports from Georgia – which forms a land route for shipments from Armenia and Turkey to Russia – including trade specifically categorised as re-exports.

“These striking trends suggest that a substantial part of additional exports to Central Asia and the Caucasus may have been re-routed to buyers in Russia… not necessarily with the knowledge of the western exporter,” the EBRD’s study says.

“The war has caused large changes to regional trade patterns,” Beata Javorcik, the EBRD’s chief economist, tells GTR. “Direct exports from western democracies to Russia have dropped dramatically. Within a few months, we saw the emergence of intermediated trade – an increase in western exports to Central Asian and Caucasus countries accompanied by an increase in exports from these countries to Russia.”

The trend is particularly pronounced in certain product categories. Exports of vehicles from the EU and UK to the three ECU countries and Georgia, for example, swelled in value by more than US$100mn between May and August 2022 compared to the same period in previous years.

The US and Europe exported more data processing machines, computers and combine harvesters to Armenia, Georgia, Kazakhstan and Kyrgyzstan than exports of the same goods to Russia fell by after the invasion.

Despite the dramatic changes in trade patterns, the extra volume of goods being channelled from Europe and the US to Central Asia and the Caucasus only “represents a small fraction of the reduction in their direct exports to Russia”, the EBRD study says.

Javorcik says this has “created an opening for other suppliers, such as Turkey and China, both of whom have substantially increased their sales to Russia”.

Exports from Turkey to the ECU countries and Georgia “saw a stratospheric increase”, according to the study, although off a low base. Direct Turkish exports to Russia also reached a “record value” later in 2022 after an initial slump following the invasion.

The strong growth in Chinese exports to Russia also continued during 2022 despite a blip following the invasion, including a rise of between 8 and 15% in shipments of fully or partially sanctioned goods to Russia, the ECU countries and Georgia.

The new trade flows have been a boon for the local ECU economies, some of which have already been buoyed by the higher prices fetched for their commodities exports due to the invasion and subsequent sanctions.

The additional trade amounts to between 4 and 6% of gross domestic product in Armenia and Kyrgyzstan, according to a separate EBRD document from February, which noted that the flourishing re-export industry has “boosted the development of [the] associated logistics industry and financial services”.

The currencies of some of the transit countries also outperformed other emerging market currencies during 2022 despite the strength of the US dollar.

 

Enforcement risk 

The suspected sanctions evasion through exports to Russia’s neighbours has already caught the attention of policymakers and regulators. Authorities in the US warned financial institutions last year to be on the lookout for such diversionary trade.

The US Department of Commerce’s Bureau of Industry Security (BIS) and the Financial Crime Enforcement Network (FinCEN) said banks should pay particular attention to several high-risk items and trade with countries beyond Russia’s immediate neighbourhood, such as Taiwan and the UAE.

Dj Wolff, a partner with law firm Crowell & Moring, says that while banks are heeding the warnings, sanctions evasion through re-exports can be tricky for financial institutions to identify.

“In a trade finance context, the bank is going to have limited information that hits its screening filters,” he tells GTR. “The end-user and country are not going to be generating any hits on their internal filters so unless something else flags in the system, the transaction will be processed.”

“The FinCEN/BIS alert flags a series of countries that present potential diversion risk, but most of those jurisdictions are central trading hubs that process substantial legitimate activity on a daily basis,” Wolff adds. “Is a bank supposed to manually review all of those transactions to catch the potential diversion?  If they do so, it stops a sizeable percentage of global trade flows.”

Banks may be on the receiving end of information requests from authorities in the US when suspected sanctions evasion is investigated, GTR has previously reported, but Wolff suggests that lenders could also be on the hook.

“If the underlying export is prohibited directly, there is enforcement risk if it is pursued indirectly, particularly if the enforcing agencies can demonstrate that the exporting or financing party knew, or should have known, about the diversion risk,” he says.

The suspected re-direction of exports to Russia has also raised alarm bells beyond Washington, with the first meeting last week of the Sanctions Coordinators Forum, which includes the EU, US, UK and other allies analysing “circumvention patterns and routes” and discussing “potential solutions”, according to EU sanctions envoy David O’Sullivan.