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West probes potential sanctions busting as exports to Russia’s neighbours surge

The EU and its allies are investigating a surge in exports to economies in Russia’s vicinity as they seek to prevent companies from evading western sanctions imposed on Moscow.

David O’Sullivan, the EU’s newly appointed sanctions envoy, told the Financial Times that big increases in trade with countries in Russia’s neighbourhood raised questions as to whether products hit by sanctions were entering the country via the back door.

“We see a massive fall-off in trade flows from the EU to Russia and unusual spikes in trade with other third countries, particularly with those in close vicinity to Russia,” he said.

“Have they suddenly developed a lot of new needs for this material, and it’s all staying there, or is some of it leaking into Russia in one form or another?”

O’Sullivan did not name individual countries, stressing that he started with a “presumption of innocence” when it came to investigating changes in trade flows.

Armenia and Kyrgyzstan are among those with sharp increases of western imports and rises in exports to Russia, according to analysis by the European Bank for Reconstruction and Development. Turkey’s exports to Russia have also surged.

The EU and partners including the US and UK are set to share intelligence on possible sanctions dodging at a meeting on Thursday as they seek to push for tighter controls, O’Sullivan said.

EU, US and UK exports to Russia slumped by more than half in the May to July period last year when adjusted for inflation, compared with the average in 2017-19, according to EBRD data that lays bare the impact of the sanctions.

But that drop coincides with a jump of more than 80 per cent in sales from Europe and the US to Armenia and Kyrgyzstan. Those two countries, in turn, more than doubled their exports to Russia during the same period, indicating a possible diversion of trade via new routes, the bank said.

Exports of products including vehicles, electronics, agricultural machinery and pumps from the EU to Central Asia increased, mainly driven by Kazakhstan, the bank added.

One of the possible drivers behind the shifting trade patterns is that western companies are voluntarily withdrawing from direct sales to Russia even when products are not subject to sanctions. However, Beata Javorcik, chief economist at the EBRD, said there were also increases in flows of goods that could “potentially” be subject to sanctions.

The government of Armenia said it “takes all measures to prevent any attempt [of] bypassing the sanctions”. Kyrgyzstan’s government did not immediately respond to requests for comment.

Turkey, which substituted some of Moscow’s old trading partners in the aftermath of the Ukraine war, posted a 97 per cent surge in its exports to Russia during the May to July period last year compared with 2017-19, according to the EBRD analysis.

Javorcik said the EBRD’s data did not suggest that the increase in trade from Turkey to Russia was related to products subject to sanctions. “Turkey is just selling a lot more of everything to Russia,” she said.

Some imports could have a dual use. Several months into the war, the Ukrainian army began to report that some of the microchips they found in captured Russian military equipment were repurposed from everyday household appliances. All the while, EU exports of white goods to Russia’s neighbours surged.

According to data from the EU’s Eurostat database, Kazakhstan imported €1mn worth of washing machines from the EU in December 2022, four times the amount it did in the December before Russia’s full-scale invasion of Ukraine. A Kazakhstan spokesperson said: “We have not seen any evidence that specific companies in Kazakhstan are being used to evade western sanctions but will continue to monitor this, and will act swiftly and firmly if we establish any wrongdoing.”

China has also stepped in to fill the void left by western exports, including by shipping increasing quantities of semiconductors to the country, according to Silverado Policy Accelerator, a think-tank.

EU ambassadors are aiming to sign off a tenth sanctions package this week, including a swath of measures aimed at closing loopholes in the existing regime — among them a ban on the transit through Russia of goods that can be repurposed for military use.

Mark Gitenstein, the US ambassador to the EU, said on Wednesday that there were “havens” where there was “circumvention going on in a major way”, although he declined to name names.

Additional reporting by Henry Foy in Brussels

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