As war in Ukraine enters 2nd year, compliance with economic sanctions on Russia is key: experts

Russian President Vladimir Putin attends a wreath-laying ceremony at the Tomb of the Unknown Soldier by the Kremlin Wall on the Defender of the Fatherland Day, in Moscow on Thursday — one day before the first anniversary of Russia's invasion of Ukraine. (Sputnik/Mikhail Metzel/Pool/Reuters - image credit)
Russian President Vladimir Putin attends a wreath-laying ceremony at the Tomb of the Unknown Soldier by the Kremlin Wall on the Defender of the Fatherland Day, in Moscow on Thursday — one day before the first anniversary of Russia's invasion of Ukraine. (Sputnik/Mikhail Metzel/Pool/Reuters - image credit)

As part of the latest round of sanctions rolled out to mark the one-year anniversary of Russia's invasion of Ukraine, U.S. officials said they are going after companies and individuals who are helping Russia find back doors to secure financing and restricted technology.

With several rounds of sanctions already in effect, a former deputy minister of energy for the Russian government says there needs to be an increase in monitoring compliance if NATO countries are serious about squeezing Russia's ability to fund and fight the war.

"The hardest sanctions have been largely already adopted. The priority should be enforcement ... which is weak at times," said Vladimir Milov, who has been living in exile in Vilnius, Lithuania, since leaving Russia in 2021.

"Putin is very effectively circumventing the sanctions."

New sanctions and export controls

On Friday, the U.S. Treasury Department announced it was rolling out new sanctions against some of those accused of helping Russia evade the ones previously imposed.

In addition to targeting Russian and Russia-based companies, sanctions were imposed on Swiss and German nationals.

The U.S. Commerce Department also announced export bans on U.S. technology and goods to a number of companies located outside of Russia, including five Chinese and two Canadian companies.

The restrictions were put in place over fears that products could be rerouted to Russia, where they could end up being used by the military.

CBC News spoke with two experts about the Russian sanctions regime who said third-party countries are aiding Russia — and they pointed to Turkey and the United Arab Emirates as being among the culprits.

Earlier this month, a U.S. Treasury official visited both countries to warn that they could lose access to G7 markets if they help Russia's defence sector evade sanctions.

Turkey's foreign minister said earlier this week that it isn't selling any products to Russia that could be used in its war effort.

Russia's economy developed resilience

Milov, who has consulted with Western politicians on how to strengthen sanctions against Russia, served as the country's deputy minister of energy in 2002. But since leaving government, he has been a vocal critic of the Russian government and President Vladimir Putin.

The sanctions were never going to have the direct immediate impact that some may have imagined, he said, and patience is key.

The Russian economy had developed certain resilience by shifting toward Asian markets and expanding its own alternative to the SWIFT international payment system, which many Russian banks have been banned from accessing since the early days of the war.

Corinne Seminoff/CBC
Corinne Seminoff/CBC

The surge in energy prices last year helped to cushion the blow of sanctions, and Milov said Russia has been able to export some of its banned resources, including coal — which became subject to an import ban by the European Union last August — by mixing its product with coal from Kazakhstan and exporting it from there as Kazakhstan coal.

"These schemes are not very easy to trace," he said in an interview this week, before the new sanctions were announced.

"There are many [EU] officials who are involved in actually drafting the sanctions and making them adopted. But I just don't see people ... in Brussels tracing all these transactions and saying, 'No, this supply chain has to stop.'"

As a former bureaucrat, Milov said, he knows the complications of hiring hundreds of additional staff dedicated to rooting out sanctions evasion but that it is needed in order to beef up the measures already in place.

"I think for the moment, we are looking at closing down the loopholes of the existing sanctions," said Maria Shagina, a senior fellow in Berlin with the London-based International Institute for Strategic Studies who has been studying the effectiveness of sanctions against Russia since 2014, when it annexed Crimea.

Overall, the sanctions are beginning to take effect, she said, but she believes Russia's oil industry should have been targeted earlier and can still be hit harder.

WATCH | Impact of sanctions on Russia starting to show, experts say:

An EU embargo on seaborne crude shipments came into effect in December, along with a $60-per-barrel price cap, which Shagina said is costing the Kremlin 160 million euros a day. She said the cap could be lowered further, even to $30 a barrel.

While the oil and gas industry is the "cash cow" of Russia's budget, Shagina said other sectors haven't been targeted by Western sanctions yet, such as Russia's diamond industry and its nuclear sector.

Consumer vs. military 

Shagina said there is an appetite by Western officials to make the sanctions more effective — and one of the trickiest areas to navigate is the blurred space around civilian goods that can be repurposed.

"How many civilian microchips ... can be repurposed for military use?" she said in an interview.

Briar Stewart/CBC
Briar Stewart/CBC

Given that civilian drones are being rerouted from Chinese companies to Russian companies, she said, consumer products could be making their way to Ukraine's battlefield.

The German news magazine Der Spiegel reported this week that Russia was talking to a Chinese manufacturer about buying 100 drones.

China's Foreign Affairs Ministry says it is not aware of any talks.

Shagina said the sanctions regime was developed under the "smart sanction" approach, which means that anything purely of civilian use shouldn't be collateral damage. But many Western brands voluntarily withdrew or curtailed their business in Russia during the past year.

Corporations go, but some brands remain

According to Yale University, more than 1,000 Western companies voluntarily cut back their operations in Russia since last February — but this doesn't mean that their products have disappeared from Russian shelves.

A number of Western brands have sold or transferred their assets to other companies, which continue to import and sell their products in Russia.

Sneaker and sportswear manufacturer Reebok struck a deal with a Turkish entity to purchase more than 100 of its retail stores in Russia. The outlets have now been rebranded as Sneakerbox and sell Reebok products.

Submitted by Konstantin Rozhkov
Submitted by Konstantin Rozhkov

About a month after Russia's invasion of Ukraine, Muscovite Konstantin Rozhkov launched a YouTube channel, where he explores the impact of the Western sanctions and corporate pullout.

"Things aren't that bad as we thought they would be in the beginning," Rozhkov said in an interview with CBC News.

"I'm hard-pressed to find any single brand that I cannot buy in Russia at the moment. Even Apple — like, I can buy Apple easily."

The right to sell the products has either been transferred to new brands, or they enter Russia through the country's parallel import scheme, which was rolled out in March 2022, to protect consumers from Western stores shuttering.

The scheme allows Russian companies to import select foreign products that were originally destined for countries near Russia and resell them without the permission of the trademark owner. This applies to a number of products across dozens of sectors, including automobiles, electronics and clothing.

In August, Russia's minister of trade and industry estimated that products brought into the country through parallel imports would reach $16 billion US by the end of the year.

Military exports

While widely available Western goods on Russian shelves may be seen to undermine the corporate pullout, Western pressure remains focused on stunting Russia's war machine, and Milov said it is working.

Putin "was only able to increase the Russian military budget by like 30 to 40 per cent annually," he said. "But what he needs is a two- or three-fold increase to actually have sufficient funds to finance this large-scale war."

Milov said Russia doesn't have the money because of the sanctions on oil and gas.

Earlier this month Russia's Finance Ministry announced that its revenue from the energy sector dropped 46 per cent year over year.

Amr Alfiky/Reuters
Amr Alfiky/Reuters

In order to squeeze the Kremlin even more, Milov said Western politicians should also step up the pressure on countries that buy arms and weapons systems from Russia.

He said Russia earns between $10 billion and $15 billion annually in arms sales to countries, including India, Vietnam and Egypt.

"We need more long-term contracts for procurement of Russian weapons to be terminated," Milov said.

"Listen, folks, you are giving Putin the top dollar or you are helping him to wage this aggression.... You have to stop."