The EU Is Caught In A Non-Workable Russia Sanctions Policy It Cannot Extricate Itself From
Attempts to persuade Central and Southeast Asian traders not to trade are doomed to fail
Western sanctions upon Russia, which began to be introduced in 2022, have as one of their primary goals the creation of maximum damage to the Russian economy in order to minimize its competitiveness in world markets. Over the past year, the West has banned almost completely any import of its products to Russia, with the exception of humanitarian items related to medicine, and certain foods and supplements.
As Russia’s trade with the United States was never especially significant, the onus of these sanctions has fallen on the European Union to carry out.
In 2021, the year prior to the conflict, the EU exported just under US$100 billion worth of products to Russia. By the end of 2022, that had fallen 38% to US$55 billion. Conversely, the EU actually imported more from Russia during 2022 than in 2021, with Russian exports increasing 25% to reach a US$204 billion.
Nonetheless, the EU wishes to see success in its sanctions policies and some benefits from its loss of US$45 billion of exports. That manifests itself by Brussels not wishing to see Russia substitute what had previously been European sourced products from alternative sources.
Twelve months on since the beginning of EU sanctions has shown that Russia, while not being able to purchase certain products from the EU, has managed to increase its trade relations with the countries of the Eurasian Economic Union and several other countries worldwide, as well as the Central Asia region with which Russia has always had reasonable trade relations. This includes Free Trade Agreements with Kazakhstan and Kyrgyzstan via the Eurasian Economic Union, as well as agreements with Tajikistan, Turkmenistan, and Uzbekistan as part of the Commonwealth of Independent States (CIS).
None imposed sanctions against Moscow, which led to a sharp increase in their trade turnover with Russia, and amongst themselves in direct contravention of what the EU wanted to see happen. In fact, the decline of EU exports to Russia coincided by the increase of Central Asian exports to Russia worth US$20 billion. Adding in export increases to Russia by countries such as Georgia, Turkiye and China – among many others – the EU export decline to Russia was more than made up for by these alternatives.
95% of these newly sourced exports to Russia were goods that fell under the EU’s anti-Russian sanctions, and included cars, electronics, agricultural machinery, pumps, and so on. The European Bank for Reconstruction and Development (EBRD) reported that by the end of September 2022, deliveries from the EU and the US to Armenia and Kyrgyzstan jumped by more than 80%, and exports of these countries to Russia doubled. In general, in 2022, the export flow from the EU towards Kyrgyzstan increased by 84%, Armenia by 72%, Tajikistan by 21%, Georgia by 19%, Kazakhstan by 14%.
Behind these figures lie several nuances, both economic and political, which largely predetermine the still cautious attitude of the United States and the EU towards Russia’s Central Asian partners. Thus far, they have not been directly accused of re-exporting prohibited goods and cooperation in the banking sector with Russia. But this may change.
After Turkiye and China, the EU considers Kazakhstan as the main re-exporter of EU sourced products, whereas Kazakhstan denies involvement in the violation of the sanctions regime. It is a hot potato, asking a Government to suppress its businesses entrepreneurial instincts, when all these countries have long established trade routes and middle- man expertise deep in their blood seems unlikely in the extreme. These are the exact same nations as established the ancient Silk Road routes. Trade is part of the Central Asian makeup and always has been. Yet Brussels now wants to interfere to save its own face.
Governments have been putting some administrative checks in place to prevent sanctions-busting and parallel imports. For example, from April 1, Astana introduced a mandatory issuance of accompanying invoices for goods in mutual trade with the EAEU countries, which supposedly should stop the re-export of goods to Russia.
However, no one knows yet how this will work in practice, with most Kazakhs convinced that this mechanism will not work against the backdrop of new, and highly profitable benefits for Kazakh companies from trade with Russia. Exports to Russia grew by 25% last year, according to Kazakhstan’s National Statistics Bureau.
Kyrgyzstan does not lag behind its Kazakh counterparts, where they also deny the existence of re-export schemes, but continue to increase trade with Russia. According to Kyrgyz statistics, by September 2022, the volume of Kyrgyz exports to Russia exceeded US$445 million, whereas the previous year it had amounted to US$238 million. In total, over the past year, the growth in exports from Kyrgyzstan to Russia increased by 233%.
According to the United Nations, from March to November 2022, exports to Kyrgyzstan from the Netherlands alone increased by 142%, giving an indication of where EU products are ending up. The sanctions are an increasingly paper tiger.
2022 was also a record year for Tajikistan, where trade with Russia increased by 23%. A similar situation has occurred in Uzbekistan, where according to the Uzbek State Statistics Committee, bilateral trade turnover with Russia at the end of 2022 had increased by 23% to US$50 billion, while Russia returned to first place as Uzbekistan’s foreign trade partner. Uzbek exports increased by almost 16%.
Armenia also saw good results: deliveries to Russia almost tripled in 2022, to US$2.4 billion. In Georgia, whose authorities retain an anti-Russian flair, politicians refused to join Western sanctions, understanding all the benefits of the current situation for them. For example, Georgian territory has become actively used for the transit of goods from Turkiye, while the country’s trade turnover with Russia last year exceeded US$2.4 billion, 52% more than in 2021. Tbilisi, justifying itself to Brussels emphasized that the overall increase in exports last year (33%) was achieved through trade with Kazakhstan (up 148%), Armenia (129%), Bulgaria (67%) and even United States (36%), while supplies directly to Russia increased by only 7%.
However, these explanations no longer satisfy the West today. Last summer, the US Treasury Department included Uzbekistan, Kyrgyzstan, Kazakhstan, Tajikistan, among others in a list of countries through which sanctioned goods can be supplied to Russia and Belarus. That prompted others to follow, with the US not taking active steps to punish re-exporters.
This reluctance is connected with the political and economic interests of the EU and the United States in the region. For example, punishing Kazakhstan is fraught with problems, as the supply of hydrocarbons to the EU, still reach the EU mainly through Russia. The political situation in Georgia and Armenia also prohibits putting pressure on the leadership of these countries, since the result of this may be diametrically opposed to what is expected.
The West is instead focusing their attention at this stage of bringing the Central Asian region into sanctions obedience. The EU Special Representative for Sanctions David O’Sullivan, appointed at the beginning of 2023, toured Asian countries, starting this with the United Arab Emirates and Turkiye, then moving to Kyrgyzstan, where he promised to impose sanctions against all Central Asian states if they will not bring their trade into line with the current EU sanctions policy.
Washington has also decided to be active and has called on financial institutions and other companies to pay attention to suspicious transactions throughout Asia. In addition, the US offered Central Asian businesses compensation of up to US$25 million to diversify trade routes and create jobs and to encourage them to break off business relations with Russia. In addition, the White House decided to coordinate its work with Brussels and promised to aggressively prevent any circumvention of sanctions against Russia.
It is still not completely clear how the West intends to confront the Asian region without creating problems for itself in the future. They are unlikely to be able to block the main channel of sanctioned products going via China, while US and European handouts to Central Asia are not sufficient and would be prohibitively expensive to replace income from trade with Russia.
Therefore, all current talk about the imposition of sanctions against the Asian regional re-exporters looks like nothing more than an attempt to intimidate the region. The practical implementation of such threats looks unlikely today, as it will bring serious problems to the West itself.
Rather than look to discourage Central and Southeast Asian traders from doing what they have been doing for thousands of years, a more practical way to deal with the problem of re-exporting would be to ban their own manufacturers from engaging in any trade volumes with the region that are in excess of their 2021 exports. Naturally, that would create severe job losses and severely damage the profits of the EU’s own export manufacturers. The EU especially, is caught in an enigma of its own making: whatever it does to try and impose sanctions and stop exports to Russia – is not capable of working.
Source: Aziz Abdraimov for the Rhythm of Eurasia with additional commentary by Chris Devonshire-Ellis
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