(Bloomberg) -- Booming trade flows with Russia’s neighbors may be a sign that sanctions imposed in the wake of Vladimir Putin’s war on Ukraine are being avoided, according to the European Bank for Reconstruction and Development.
The US and the European Union have slapped trade limits on nearly every sector of the Russian economy, blocking it from imports f everything from luxury goods to computer chips and raw materials that can be used to build weapons and fuel President Vladimir Putin’s war machine.
German exports to Russia fell to 38% from May to July last year from the average of the same period between 2017 and 2019. But they almost doubled to Armenia and more than tripled to Kyrgyzstan — a trend also seen in trade flows to the Caucasus and central Asia from the US, the UK, and other EU states, the European Bank for Reconstruction and Development said Thursday.
“It could be linked to sanctions busting,” Beata Javorcik, the EBRD’s chief economist, said in an interview. She added that Ukraine’s economy, after a 30% drop on an annual basis in 2022, will stabilize this year.
The EU is poised to adopt a 10th package of sanctions next week ahead of the one-year mark of the Russian invasion. As part of the package, the bloc’s leaders want to force banks to report assets related to Russia’s central bank, and target another 11 billion euros of goods through trade bans and technology controls.
While there is no blanket embargo on all items, and trade with Russia’s neighbors hasn’t been restricted, big shifts are evident. According to Javorcik, it may be due to companies wanting to avoid due diligence on counter-parties. Some companies may also be having issues with processing payments, she said.
Armenia, Kyrgyzstan and Kazakhstan are all in a customs union with Russia and Belarus as members of the Eurasian Economic Union, a Moscow-led rival to the EU. There are no barriers for goods exported to these countries to be moved on to Russia by traders.
Still, exports to Russia from its Eurasian Economic Union partners soared last year, as did sales from Turkey to Russia. Some of the items crossing the border have raised suspicion that Russia is resorting to creative measures to get hold of dual-use items to create weapons such as tanks and cruise missiles.
Last year, European officials said they had seen parts showing up in Russian military equipment from refrigerators, washing machines and even breast pumps following a surge in exports of those products to countries in the Caucasus region and central Asia.
The prime minister of EU and NATO member Latvia, Krisjanis Karins, called this month for a crackdown against anyone trying to skirt the sanctions.
“I think its very important to look at the loopholes,” he said on Feb. 3. “It seems quite clear that traders are finding ways to legally trade goods say with Turkey, or Kazakhstan or Armenia which are then resent to Russia because these countries are not adhering to the sanctions regime.”
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