Initial predictions of the West’s unified financial campaign on Moscow argued that sanctions would inevitably lead to the crash of Russia’s economy. However, by looking south to Central Asia and the Caucasus, Russia has been able to withstand financial pressure and continue its war efforts against Ukraine, significantly weakening the West’s ability to enforce its current sanctions regime.
Bound by proximity and shared history, the former Soviet republics in Central Asia and the Caucasus have become a refuge for Russian citizens and businesses fleeing the war. Consequently, the regions are now Moscow’s transport hub for critical resources at a time when much of the international community has severed their relationship with the authoritarian regime.
Russian imports from countries like Kazakhstan and Kyrgyzstan, which have chosen to not join Western sanctions against Russia, continue to swell with semiconductor technology from U.S. and European companies. This is partly due to their membership in the Eurasian Economic Union, a Russia-led coalition of trade partners. Member countries of the alliance can easily engage in trade partnerships, which support the free movement of goods, creating the opportunity for sanctioned products to easily enter Russia.
At the same time, the West has not leveled comprehensive sanctions on members of the Eurasian Economic Union, except for Russia and Belarus. This permits the flow of products between Central Asia and neighboring countries Georgia and Azerbaijan. The consequence is apparent when considering the trade flows of Russia, Central Asia, and the Caucasus since the start of the invasion. Sanctions have dramatically lowered the number of exports entering Russia but simultaneously created a significant increase of goods entering the Eurasian Economic Zone and Caucasus, offsetting the West’s desired outcome.
The trend signals the Kremlin’s expansion of its shadow economy in neighboring regions. The strategy comes in tandem with a decree issued by President Vladimir Putin a month after Russia’s invasion that permits “parallel imports” to enter Russia, positioning Moscow to receive prohibited goods through unauthorized channels.
Under Putin’s decree, Western manufacturers and distributors that send sanctioned items to countries neighboring Russia are not allowed to prevent the resale of goods, granting Russia access without any obligation to report further sales, complicating sanctions enforcement. Putin utilizes the network of Russian proxies and businesses set up in neighboring regions to act as middlemen in these transactions to avoid sanctions.
Putin’s strategy to manage the economic consequences from his invasion of Ukraine is effectively undermining the European Union’s sanctions regime. An example of Russia’s sanctions circumvention can be found in a recent investigation by the Organized Crime and Corruption Reporting Project, which discovered that exports from Kazakhstan have dramatically increased since early 2022. The exports were traced back to several companies based in the Netherlands and Germany.
The European Union is responding to the dilemma. The EU’s 12th sanctions package added several companies to its list, including entities based in Kazakhstan and Uzbekistan. Though an appropriate step, Western allies should coordinate and tighten their regime to effectively counter Putin’s strategy.
The U.S. and EU should impose secondary sanctions on Central Asia, Georgia, and Azerbaijan for enabling sanctions diversion on behalf of the Kremlin. These countries do not have significant economic relationships with much of the West, making them perfect candidates for such measures. Taking this aggressive step will pressure them to comply with sanctions and complicate Moscow’s diversion strategies, especially as they look to capitalize off Russia’s waning influence and become more formidable players in global trade.
Secondary sanctions are also justifiable, as seen in the case of the recently arrested academic and economist Gubad Ibadoghlu. Ibadoghlu’s research on the corruption of the Azerbaijani regime and intent to discreetly sell Russian oil to the EU underpins the severity of the issue and Moscow’s intent to remain relevant in the global economy.
Likewise, the U.S. and EU should enforce a quota regime on sanctioned products that flow into the Central Asia and Caucasus regions that prohibit trade from exceeding pre-war levels. Such measures are appropriate since trade inconsistencies relating to banned items likely indicate Moscow’s sanctions evasion tactics. Certain products are already under similar restrictions; however, not all are. Western countries should include all sanctioned goods under these trade limitations.
Lastly, the sanctions coalition should strengthen collaboration with customs agencies in key evasion hubs. Due to the illegality of sanctions evasion, corrupt actors depend on trade-based money laundering techniques to avoid detection. Through well-functioning customs agencies, sanctions diversion schemes will become easier to detect, complicating the Kremlin’s evasion tactics.
A consequence of all sanctions is the ability of targets to adjust. Moscow’s shadow practices have provided a critical lifeline to its financial and wartime resources. To cut Moscow’s access to the international market, the West needs to ratchet up the pressure.