How Russia Keeps Expanding Its Toolset To Evade Sanctions

Following Russia's invasion of Ukraine in 2022, the U.S., the E.U. and a number of their Western allies imposed a comprehensive package of sanctions on Moscow, leading to various changes in the dynamics of global trade and, indeed, Russia's strategy.

As the routes and means of transportation for goods have been adjusted, entire industries have sought out alternative suppliers. Countries and private companies alike are rebalancing their trade relationships with Russia—with some boycotting Moscow while others hope to profit from others' loss of access to Western markets.

Russian Tactic

From the outset of the war, nations were split between opposition to Moscow's actions, support for them (in rare cases), and maintaining a position of strategic neutrality on the matter. Many leaders in Africa preferred the latter option. Countries such as South Africa, Kenya, Sudan, the Central African Republic (CAR), and Mali, among others, have maintained close ties with the West and, at the same time, continued their trade relationships with Russia.

With sustained international development in mind, in addition to the leverage that a united developing world commands in international organisations, African leaders neither wanted to miss out on economic opportunities nor alienate Russia as a supporter regarding their self-interests at the U.N. or the WTO.

Among these interests is also the steady flow of Russian arms into Africa. Russia has emerged as sub-Saharan Africa's foremost arms supplier in recent years. On the flip side, losing access to sizable markets in Europe, the Americas and beyond, Russia also adjusted its foreign policy, embarking on a charm offensive in developing countries that continue to purchase its oil and gas and serve as a supplier of natural resources.

While Western countries cannot compel third parties to join their sanctions regime against Russia in response to the war in Ukraine, in rare cases, when collaboration with Moscow crosses certain red lines, compliance can be enforced. South Africa's alleged weapons transfer to Moscow, for example, invited sustained international scrutiny and brought about repercussions from the West in the form of diminishing diplomatic ties and investments.

The West can retaliate against sanctions violators through reduced development aid and investments. Still, the most challenging endeavour during the last two years of the war proved to be uncovering violations. One of Russia's most significant export products has been oil, which Western sanctions targeted from day one. Most Western countries impose the G7-devised oil price cap, which restricts access to partner ports and transportation services unless oil is sold significantly below market prices.

Outright facilitating Russia's sanctions evasion would sour private sector companies' relations with the West, tarnishing their reputation. However, sanctions evaders have been so difficult to detect because of the elaborate schemes they deploy, operating in the shadows and using opaque regulatory systems to avoid being outed. With the use of cryptocurrencies and a network of intermediaries, Russia has been able to import dual-use technology and even weapons in violation of international law.

Russian Crackdown

The U.S. Department of the Treasury has already cracked down on several procurement networks that used third-party countries to acquire microelectronics components, natural resources, and weapons. Examples include Andrey Sudakov's gold laundering network, which used Hong Kong-based front companies. Similarly, Shanghai-based Transit International Forwarding Agency Co Ltd was used to send unmanned weapons systems to Russia.

In the oil trade, Russia continues to deploy a shadow fleet of vessels that facilitate ship-to-ship transfers of oil, thereby masking its Russian origin and ensuring the evasion of the price cap. Russian oil is also sent abroad to strategically selected ports, for example, in West Africa, where intermediaries rebrand and resell the oil under the banner of local companies.

These relationships are far from being one-sided, unilaterally benefitting Russia. Western companies can be just as culpable in their endeavours to seek out Russian partners to benefit from sanctions evasion, splitting the profits with their Russian counterparts and benefiting those close to the Kremlin.

International Hold

A Geneva-based commodities trading company has recently been scrutinised for facilitating Russia's sanctions evasion by directing cargo traffic to a UAE-based subsidiary. Paramount Energy and Commodities S.A. is investigating whether its stakeholders, including owner Niels Troost, profited from the sale of large volumes of Russian oil via its Dubai-based subsidiary company, Paramount Energy and Commodities DMCC.

Alleged profits were as high as 20 million dollars per sale of sanctioned oil. Questions are also being asked regarding a related grain trading company, Harvest S.A., in which Niels Troost is an investor, which may have leveraged established grain trading routes to similarly circumvent Western sanctions and trade in both stolen Ukrainian grain and sanctioned Russian oil.

The United Kingdom has already put Paramount SA, Troost himself and the director of Paramount's UAE subsidiary Paramount Energy and Commodities DMCC, through which the sanctions evasion was conducted, Francois Mauron, on its list of sanctioned individuals and entities. At the same time, the case has attracted the close attention of Western policymakers, the Financial Times and the Wall Street Journal, all of whom have emphasised the opaque business and financial regulatory framework of Switzerland that has allowed for the funnelling of Russia-destined funds in violation of Western-imposed sanctions.

This case of Niels Troost takes on even greater importance when considering that Switzerland, where Niels Troost is based, joined its European neighbours in upholding their sanctions policies.

Russia's toolset for minimising the fallout from its war in Ukraine, specifically about Western sanctions, is quite diverse. While partners in developing countries are challenging to identify, the West also has an internal problem with sanctions evaders.

Current laws make it challenging to uncover illicit operations in Switzerland and the E.U. more broadly, as recent discussions in the European Parliament revealed. As the gap between introducing new sanctions and their practical implementation persists, policymakers must constantly develop their approaches to keep up with new and new ways Russia is adjusting to its new international standing.