Russia circumvents Western sanctions with help from friends

WASHINGTON – A strange thing happened to smartphones in Armenia last summer.

Shipments from other parts of the world to the tiny former Soviet republic began to flow at more than 10 times the value of phone imports in previous months. At the same time, Armenia registered an explosion in its smartphone exports to a beleaguered ally: Russia.

The trend, which was repeated for washing machines, computer chips and other products in a handful of other Asian countries last year, provides evidence of some of the new lifelines keeping the Russian economy afloat. Recent data shows increases in trade with some of Russia’s neighbors and allies, suggesting that countries such as Turkey, China, Belarus, Kazakhstan and Kyrgyzstan are stepping in to supply Russia with many of the products that Western countries have sought to cut off such as punishment for Moscow’s invasion of Ukraine.

These sanctions – which include restrictions on Russia’s largest banks along with restrictions on technology sales which its military could use – blocks access to a number of products. Reports regularly filter out of Russia of consumers frustrated by expensive or shoddy goods, from milk and home appliances to computer software and medicine, Maria Snegovaya, senior fellow for Russia and Eurasia at the Center for Strategic and International Studies, said at an event at the think tank In this month.

Still, Russian trade appears to have largely returned to where it was before the invasion of Ukraine last February. Analysts estimate that Russia’s imports may have already returned to pre-war levels, or will soon, depending on their models.

In part, this may be because many nations have found Russia difficult to leave. Recent research showed that fewer than 9 percent of companies based in the EU and Group of 7 nations had divested one of their Russian subsidiaries. And maritime tracking firms have seen a surge in activity, sending fleets that can help Russia export its energy, apparently circumventing Western restrictions on those sales.

While Western countries have not banned the shipment of consumer products such as mobile phones and washing machines to Russia, other sweeping penalties expected to hit the economy. They include a cap on the price Russia can charge for its oil as well as limited access to semiconductors and other critical technology.

Some companies, including H&M, IBM, Volkswagen and Maersk, halted operations in Russia after the invasion, citing moral and logistical reasons. But the Russian economy has proved surprisingly resilient, raising questions about the effectiveness of Western sanctions. Countries have struggled to reduce their dependence on Russia for energy and other basic commodities, and the Russian central bank has managed to prop up the ruble’s value and keep financial markets stable.

On Monday, the International Monetary Fund said it now expects the Russian economy to grow by 0.3 percent this year, a sharp improvement from its previous estimate of a 2.3 percent decline.

The IMF also said it expected Russian crude oil export volumes to remain relatively strong under the current price cap and that Russian trade would continue to be diverted to countries that had not imposed sanctions.

Most container ships have stopped transporting goods such as telephones, washing machines and car parts to the port of St. Petersburg. Instead, such products are transported on trucks or trains from Belarus, China and Kazakhstan. Fesco, the Russian shipping operator, has added new ships and new ports of call a route with Turkey that transports Russian industrial goods and foreign appliances and electronics between Novorossiysk and Istanbul.

Sergey Aleksashenko, former deputy finance minister of the Russian Federation, said at an event this month that 2023 would be “a difficult year” for the Russian economy, but that there would be “no catastrophe, no collapse.”

Some parts of the Russian economy are struggling, he said, pointing to car factories that shut down after they were unable to secure parts from Germany, France, Japan and South Korea. But military spending and higher energy prices helped support it last year.

“We must not say that Russian economy is broken, that it is destroyed, that Putin lacks funds to continue his war,” Mr. Aleksashenko said, referring to President Vladimir V. Putin. “No, that’s not true.”

Russia stopped publishing trade data after its invasion of Ukraine. But analysts and economists can still draw conclusions about its trade patterns by adding up the trade that other countries report with Russia.

Matthew Klein, an economic writer and co-author of “Trade Wars Are Class Wars,” is one of those who draw conclusions about this Russia-sized hole in the global economy. According to his calculationsthe value of global exports to Russia in November was only 15 percent below a pre-invasion monthly average.

Global exports to Russia most likely came full steam ahead in December, although many countries have yet to release their trade data for the month, he said.

“Most of that recovery is generally driven by China and Turkey in particular,” Mr. Klein.

It is unclear how much of this trade violates sanctions imposed by the United States and Europe, but the patterns are “suspicious,” he said. “That would be consistent with the idea that there are ways to try to circumvent some of the sanctions.”

The Silverado Policy Accelerator, a nonprofit organization in Washington, recently issued a similar analysisand estimated that the value of Russian imports from the rest of the world had exceeded pre-war levels by September.

One of the case studies in this report was the jump in sales of Armenian smartphones. Andrew S. David, senior director of research and analysis at Silverado, said the trends reflected how supply chains had changed to continue supplying Russia with goods.

Samsung and Apple, formerly major suppliers of Russian mobile phones, pulled out of the Russian market after the invasion. Exports of popular Chinese phone brands such as Xiaomi, Realme and Honor also fell initially as companies struggled to understand and cope with new restrictions on sending technology or making international payments to Russia.

But after an “adjustment period,” Chinese brands began to take off in Russia, David said. Total Chinese exports to Russia hit a record high in December, helping to offset a sharp decline in trade with Europe. Apple and Samsung phones also appeared to be starting to find their way back to Russia, diverted through friendly neighboring countries.

“Armenia is certainly not the only one,” said Mr. David. “A lot comes through central West Asia, Turkey and the former Soviet republics.”

Shipments to Russia of other products, such as passenger cars, have also increased. And China has increased exports of semiconductors to Russia, even as Russia’s overall chip imports remain below pre-war levels.

A big open question is how effective the western price ceiling will keep Russia’s oil revenues down this year.

The cap allows Russia to sell its oil globally with the help of Western maritime insurance and financing, as long as the price does not exceed $60 a barrel. This limit, which is essentially an exemption from Group of 7 sanctions, is designed to keep oil flowing in global markets while limiting the Russian government’s revenue from it.

Some analysts have suggested that Russia is finding ways around the effort by using ships that do not rely on Western insurance or financing.

Ami Daniel, chief executive of Windward, a maritime data company, said he had seen hundreds of cases where people from countries such as the United Arab Emirates, India, China, Pakistan, Indonesia and Malaysia bought vessels to try to set up, what seemed. to be a non-Western trade framework for Russia.

“Basically, Russia has been preparing to be able to act outside the rule of law,” he said.

Mr. Daniel said his company had also seen a sharp increase in shipping practices that appeared to be Russian efforts to violate Western sanctions. They include transfers of Russian oil between ships far out at sea, in international waters not under the jurisdiction of any country’s navy, and attempts by ships to mask their activities by turning off satellite trackers that log their location or by sending false coordinates.

Much of this activity had taken place in the mid-Atlantic. But after media coverage of suspicious practices in that region, the hub moved south, off the coast of West Africa, Mr. Daniel.

“They’re exploding,” he said of deceptive shipping practices. “It’s happening on an industrial scale.”

So far, the oil price cap appears to be achieving its goal of reducing the price Russia can charge while keeping global supplies flowing. But it remains to be seen whether this shadow fleet of ships is large enough to allow Russia to buy and sell oil outside the cap, Ben Cahill, a senior fellow at the Center for Strategic and International Studies, said during a panel discussion in January .

“If that fleet is large enough that Russia can really operate out of reach of the Group of 7 countries, the cap probably “won’t have the kind of leverage that politicians wanted,” Mr. Cahill said. “I think We should know within a few months.”

Alan Rappeport contributed with reporting.

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