The best proof that Western sanctions on Russia are working is how the Kremlin is being forced to use its wits to try to avoid them.
In recent months, as bans on the sale of Russian products multiplied, the authorities (and citizens) of the Eurasian country have been forced to explore all possible ways to sell goods, get ahold of imported products, or transfer or receive money abroad.
The recent experiences of Iran or Venezuela have served as an inspiration. Both countries — like Russia — are large energy exporters forced to live on the margins of sanctions. Hence, they are also forced to use all possible routes to avoid them.
The precedents of Iran and Venezuela, however, are only valid up to a certain point. Never before has a global power like Russia been subject to such a high volume of bans and sanctions designed to torpedo its economic activity, in such a short period of time.
Craig Kennedy — a historian and Russia expert at Harvard’s Davis Center — notes that, overnight, a country that has been selling crude oil to Europe uninterruptedly for 140 years has found itself backed into a corner. This is how Russia has reacted:
A mysterious fleet of oil tankers
Western sanctions on Russian crude oil run have been applied in two ways: via a total ban in the European Union and in the G-7 countries, as well as through a price cap of $65 per barrel whenever it is transported by Western shipping companies to any destination.
The first obstacle is difficult for Moscow to avoid. Mixing its oil with that of other origins is the only way to try to sneak this energy product into the West, but this is only happening little by little. In terms of the second limitation, however, the Kremlin has chosen to go big, employing a fleet of hundreds of ships to transport its own crude. Erik Broekhuizen — a trader with the New York firm Poten & Partners — describes this as a “shadow fleet.” While it is organized and financed by Russia, the fleet operates under the flag of third parties: above all, India, China and the United Arab Emirates, according to Viktor Katona, the head of oil analysis at Kpler, a provider of intelligence services for commodity markets.
This flotilla is mostly made up of secondhand boats, some of them decades old. Many aren’t equipped with transponders (the systems that emit real-time information about their positions), to avoid being detected. Hence, the boats are at major risk of collision, while also being huge ecological threats to the oceans.
“Before the war, these ships were used to transport Iranian or Venezuelan crude oil in defiance of U.S. sanctions,” Broekhuizen explains by email. The 150 to 200 shadow ships that were sailing around the world before the invasion of Ukraine have increased to between 300 and 600, according to this trader’s calculations.
These ships aren’t exactly cheap. According to Katona, each costs between $20 and $30 million. But this is the only possible way for Russia to avoid the yoke of sanctions.
India: an energy escape
With the West gone, one name is emerging with particular force in the new Russian crude supply chain: India.
The world’s most-populous nation isn’t only a shelter for a large part of Russia’s fleet of oil tankers — it’s also the ultimate destination for crude oil exports.
“The Kremlin has built a great relationship of trust with this country: since the start of the war, there hasn’t been a month during which India has stopped increasing its purchases of Russian crude,” says the Kpler analyst. The figures back up his words: India’s imports of Russian crude have increased six-fold in the last year.
India, in turn, has skyrocketed its fuel exports — especially diesel — to Europe. In other words: much of the diesel that the EU used to buy directly from Russia now arrives via New Delhi. At a higher price, of course… and also produced with Russian crude.
The new route, however, comes at a significant cost for Moscow. Firstly, because substantial discounts have to be applied to the barrels of crude, to make the supply attractive to Indian importers. Secondly, because of the higher freight rates: India is much farther away than traditional Russian clients in Europe. The combination of both factors is pushing Russian oil revenues to around $30 a barrel, according to Kennedy’s calculations. That is to say, half of the Western cap and much less than what is necessary to balance Moscow’s battered public accounts.
“While [Russia] continues to export, it does so at much higher costs and, therefore, with lower profitability,” confirms Maia Nikoladze, an analyst at the Atlantic Council who specializes in Eurasia.
China: yuan, gold and gas
Today, two world powers — one in clear decline (Russia) and the other experiencing an unstoppable rise (China) — need each other more than ever.
The recent visit of Chinese President Xi Jinping to Moscow has shown the extent to which the Kremlin will have to rely on Beijing to survive the Western siege. Moscow’s proposal to use the yuan in its transactions with Asia, Africa and Latin America is intended to de-dollarize what remains of Russian commercial networks.
Currency, however, is not the only area where Vladimir Putin is trying to persuade China to help him dodge Western sanctions. The Asian giant has become a huge buyer of Russian gold — now banned in the West — in exchange for juicy discounts.
Last year, after the invasion of Ukraine, both countries signed an agreement valued at more than $120 billion for the purchase of Russian oil and gas. This task will greatly facilitate the future Power-of-Siberia 2 gas pipeline, which was started before the pandemic: the project will cross over Mongolia and should be ready by 2030.
Turkey: a new bridge for imports
Forced by the need to maintain the flow of Western goods — and under the euphemism of “parallel imports” — Moscow has effectively legalized smuggling.
According to Vladimir Bulavin — the head of Russia’s Federal Customs Service — between March and December of 2022, goods valued at over $18 billion passed through Turkey into Russia. This has made it possible to satisfy some of the demand that the Russian population has for Western products.
“A large part of the population — those who support Putin — have noticed the sanctions less, because they consume simple products: furniture, clothing, food or household appliances made in Russia,” says Russian economist and political scientist Vladislav Inozémtsev, who spoke to EL PAÍS via phone.
“There are a large number of products that have not fallen under the sanctions, such as household products, construction materials and animal vaccines. Along with many other goods that, if they didn’t show up, would put the Russian economy in much worse of a state. But [no country] is going to ban the export of things such as medicine.”
To get around sanctions that do weigh on other goods that may have a dual military use — such as computer equipment, chips, lasers, video cameras or some chemical products — several alternative import routes have been opened up. The products manufactured by Western multinationals that left Russia after the invasion also pass through these routes, from phones to fashion.
The largest of these routes — although not the only one — is Turkey, where purchases of products from the EU have skyrocketed at the same rate that exports from the 27 nations to Russia have plummeted. Although economically beneficial, Turkey’s position is not exactly comfortable: a NATO member, its two main export destinations are Germany and the United States… light-years away from Russia.
In the midst of a wave of European and American pressure, at the beginning of March 2023, Ankara tightened restrictions on companies that participate in this export scheme, assuring its allies that it would stop the transit of these products through its territory to Russia. This is another road that — at least formally — is now closed. And yet another reason for the Kremlin to search for a new channel to boycott Western sanctions.
Central Asia: technology and food
Turkey is joined by another traditional route that benefits Russia: Iran. Along with others, according to Matthew Klein, a co-author of Trade Wars are Class Wars (2020), who mentions two other Central Asian countries: Kazakhstan and Kyrgyzstan.
“In addition to the chips that are arriving via Turkey or Hong Kong and the drones through the United Arab Emirates, some border countries — such as Kazakhstan — are being used [by Russia] to evade sanctions,” summarizes Elina Ribakova, a senior analyst at the Institute of International Finance.
This is one of the routes chosen, for example, for the transit of some products, such as the latest mobile phones. Although it’s prohibited to sell them in Russia, it’s not prohibited for Russians to buy them in other countries.
“An attempt has been made to identify the companies that buy these products… but it’s useless, because this week they have one name and the next week, another,” says Inozémtsev. She also points to the tech giants as being able to play a possible role in helping regulators find out which devices have been brought into Russia illegally.
In any case, restrictions on the import of chips or drones are helping to curb the Russian war machine. “This is why the Kremlin is turning to Iran to arm itself and is looking for China to give in,” says Inozemtsev.
However, Maia Nikoladze — from the Atlantic Council — recalls that, in recent days, chips of U.S. origin used in Russian military equipment have been found in Ukraine. They were “probably sold through Turkey or Kazakhstan.” A route that, she says, the West should work even harder to close.
Last year, several multinationals announced their departure from Russia and the sale of their assets to former partners, who may operate in the country to facilitate a possible return in the future. Giants like McDonald’s, Coca-Cola, Ikea, Inditex and Valio are just a few examples.
“Many have not changed their suppliers in Asia, products arrive bearing other labels,” business sources say. Other multinationals had factories on Russian soil before the war and developed a complicated logistics scheme to keep them open. The South Korean firm Samsung, for example, decided that its plant in the Kaluga region would sell its products to other members of the Eurasian Economic Union (Armenia, Belarus, Kazakhstan and Kyrgyzstan), and then the goods would subsequently be “repatriated” to Russia through parallel import routes.
UnionPay and Mir: two unstable alternatives to the Swift payment system
After the Swift international transfer system was suspended in Russia, Moscow has not stopped looking for alternative ways to avoid total economic isolation. The main one — the Mir mechanism — gained acceptance in Turkey and other Asian countries in the first months of the war, but since the United States threatened to sanction banks that use it, many nations have backed down.
The Chinese system UnionPay appeared immediately after, but it is totally unstable outside of Russia. Many clients complain that they cannot do banking operations when foreign banks detect its origin.
“It all depends on the Russian entity that issued the card, the specific payment terminal and the country,” warns Russsia’s Tinkoff Bank.
“My experience has been terrible: I can’t transfer my savings,” Yulia, a Volgograd woman, tells EL PAÍS. She left the country at the end of last year to try to start a new life in Istanbul, where she opened a UnionPay account at the Turkish DenizBank.
An Austrian bank and the crypto world: two emergency exits that are quickly closing
Russia’s emergency exit within the European banking system has been — until now — Raiffeisen, an Austrian entity. The bank earned a record $4 billion in 2022, with Russia being its main client. This bank has allowed euros and dollars to be sent to accounts opened at its branch in Moscow, although they are always subject to the Russian law which only allows money to be withdrawn if it is changed to rubles. This implies a worse exchange rate than the official one. However, it no longer seems to matter: this scheme — which was very useful for expatriates and businesses linked to the West — has been nearing the end since February, when the United States opened an investigation into Raiffeisen.
Since then, the Austrian entity has been complying with sanctions. The penultimate step was taken a few days ago, when Raiffeisen imposed a minimum amount of €20,000 ($21,800) for any transfers to Russian banks, cutting off many smaller clients. In practice, this prevents small and medium-sized Russian business owners and individuals from being able to pay key expenses, such as rent. The last step was taken this past Friday, when Raiffeisen announced that it would be selling its Russian branch, limiting its activity in the meantime.
Another of the means utilized to obtain hard currency in Russia has been cryptocurrency exchange platforms. The mechanism is quite simple: with a digital wallet, crypto is bought from other users with rubles. Subsequently, the virtual currency is later converted into euros or dollars and vice-versa. This door, however, is also closing: as of March 9, the largest of all these platforms — Binance — prohibited the purchase of Western currencies in Russia and of rubles in Europe and the United States.
In anticipation of this step, Russian banks have promoted their integration with cryptocurrencies. Sberbank — the largest entity in the country with 100 million customers — already has its own platform, which is compatible with Ethereum.
What comes next?
Russia is managing to dilute the impact of Western sanctions, but is far from avoiding them entirely. The Russian economy, in fact, has already been dealt blows on several fronts: exports, industrial output, income and consumption have all declined, at levels comparable with the first wave of Covid.
“Neither has it been the immediate economic collapse that some expected, nor has it caused the expected damage to [Ukraine’s] allies, which consume Russian energy,” says Klein. “The Russians have emigrated en masse, taking their money with them; the authorities themselves admit that the lack of investment and access to high-tech goods will cause long-term economic damage.”
Hence, despite these temporary loopholes, Moscow is desperate to get sanctions lifted. Shortcuts aside, the country’s future is “bleak and isolated,” in the words of Ribakova of the IIF.
“Russia is now realizing the difficulty of finding good alternatives to Europe,” says Kennedy of the Davis Center. Even with the aforementioned string of shortcuts, “over the past few months, the weakness of their oil revenues will degrade their resilience. And it will hasten the moment in which Russia decides that continuing the aggression against Ukraine is not the best option” he affirms.
Inozemtsev is much less optimistic. The Kremlin, he says, still has reserves to last “one or two more years.”
“Putin is determined to continue the war, [his attitude] is somewhat maniacal and irrational.”
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