Germany to crack down on sanctions dodgers as non-EU trade turnovers with Russia soar

Germany to crack down on sanctions dodgers as non-EU trade turnovers with Russia soar
Thanks to trade with "friendly countries" Russian companies have managed to replace or dodge most of the sanctions imposed on machinery and technology. / bne IntelliNews
By Ben Aris in Berlin February 24, 2023

Germany's Deputy Chancellor, Robert Habeck, has announced that Berlin will crack down on EU companies that dodge Western sanctions on Russia, as governments become increasingly alarmed at the scale of the sanctions leakage, the Financial Times reported on February 24.

Germany is especially vulnerable to sanctions leakage. Before the war it had ten times the number of companies registered in Russia than any other EU nation. Moreover, since the war started, only 9% of foreign companies that said they would leave have actually pulled out. Amongst the German companies working in Russia, only 4% have closed shop.

Habeck proposed clamping down on the practice of companies selling goods to Russia via third countries and threatened them with criminal prosecution for false export declarations if caught. Habeck said sanctions evasion was "no minor misdemeanour" and called for a stricter regime to police sanctions abuse across all the EU member states.

The most recent EBRD Transition report contains details of the rapidly changing trade flows since sanctions were imposed a year ago. While Russian trade turnover with the EU has plunged, that for its trade with “friendly countries” has soared. Turkey in particular has overtaken Germany as the Exportweltmeister and become the major entrepot for goods travelling to Russia from the rest of the world. The EBRD noted that while Turkey’s exports to Russia have soared, its imports from Europe have not changed much, suggesting that most of the goods being sent to Russia from Turkey are made in Turkey.

That is not the case with other countries in the Commonwealth of Independent States (CIS) that have seen their imports of Western goods soar and exports to Russia likewise balloon. Kyrgyzstan, Armenia, Georgia and even Estonia have all seen sharp rises in trade turnovers, the EBRD reports. The export of washing machines to Armenia in particular has jumped, which contain chips that can be used in missile manufacture.

The sanctions leakage is particularly worrying with technology and machinery, for which Russia is almost entirely dependent on Western supplies. In theory the technology sanctions are one of the easiest to police as the Western companies have an almost monopolistic control of the sector. In practice Russian companies have said they have been able to replace almost all of these imports, with China playing a leading role (67%).

However, in a recent survey by the Gaidar Institute in Moscow in Russia 15% of Russian companies polled said they had “somehow” managed to continue to import Western sanctioned machines and technology. Russian manufacturers have also stepped into the breach, investing heavily into retooling to fill the hole left by departed Western supplies and now account for two fifths (39%) of sourcing needs. The countries of the Eurasian Economic Union (EAEU) and Turkey account for another 21% and 17% respectively.

The Gaidar Institute also found that Russian companies have also replaced the bulk of sanctioned spare parts with imports from friendly states. China again plays the leading role accounting for almost two thirds (63%) of the imports for industrial companies switching suppliers. Russian analogues of imported parts were bought by 46% of enterprises, and another 22% reported that they can still import sanctioned spare parts from the West via schemes. Suppliers from the EAEU countries and Turkey played the same role in parts as they do in machines.

“Russia is getting everything it needs, albeit at higher costs and with more difficulty,” Elina Ribakova, deputy chief economist at Institute of International Finance (IIF), told bne IntelliNews in a recent podcast about the impact of sanctions on Russia’s economy.

The EBRD study of trade data shows that a "considerable amount" of sanctioned products are being exported from the EU and Germany to third countries "and then exported further from there to Russia", despite the severe sanctions. Habeck's economy ministry released a paper stating that "we have to jointly deal with these [attempts to] bypass sanctions more effectively than we have up till now, both on a national and an EU level,” the Financial Times reported.

Germany will push for the proposals to be included in the EU's 11th package of sanctions against Russia, with Habeck stating that businesses evading sanctions were "betraying the interests of [the Ukrainian] people who are fighting for their freedom." EU ambassadors are due to sign off a tenth sanctions package on February 24.

Habeck is proposing a new level of reporting where exporters have to provide a transparent "end-use statements" that identify the ultimate beneficial recipient of an exported good as part of their export declarations, rather than just the first port of call for a departing good. The system would be the trade equivalent of the introduction of “blood diamond” certificates of origin that were introduced to prevent the sale of diamonds from Africa produced by authoritarian regimes to fund wars.

Habeck’s new rule would apply to "all sanctioned goods that have significance for Russia's war machine". Anyone who provides false information in the end-use statement would face criminal conviction.

Habeck's intervention came as the EU and its partners, including the US and UK, met to share intelligence on possible sanctions dodging. David O'Sullivan, the EU's newly appointed sanctions envoy, explained to the Financial Times the EU’s concerns of sanction dodging schemes sourcing goods from the EU.