Not so Isolated: How Russia Employs the FSU to Circumvent EU Sanctions

More than four and a half years have passed since Russia began its war of aggression against Ukraine. Countries around the world have grappled with the appropriate methods to both hold Russia accountable and diminish its ability to continue its attacks on Ukraine. Sanction regimes in response to aggressive military campaigns against Russia aren’t new. A variety of sanctions have been raised against Russia for quite some time– a prominent example being during its campaign to annex Crimea in 2014. The United States levied two sanctions regimes against Russia following the annexation – one in March of 2014 directed at 16 individuals said to be in Putin's inner circle, and another round in July of the same year targeting major Russian industrial powerhouses such as Gazprombank OAO and VEB from being able to seek financing, along with targeting more individuals. Since launching their 2022 attack, the international community has enforced unprecedented sanctions on Russia. They were incredibly coordinated and swift in their retaliation against Russia – freezing financial assets, sanctioning trade, and significantly limiting Russia's access to global markets, along with some of its major banking institutions being cut off from SWIFT – a major financial market communication system. For example, an estimated 80% of all Russian banking assets came under U.S. sanctions. Although these sanctions have been effective in restricting Russia's access to Western markets and dealing substantial blows to its economy, Russia has still found ways to use former Soviet nations to circumvent them. 

The purpose of the sanctions is to constrict the Russian economy to the point where it could no longer sustain its war efforts. Shortly after the invasion began, 45 countries, including major economies like the US, UK, and EU, enacted sanction regimes targeting blue-chip economic items such as dual-use technology, luxury goods, and industrial goods, among other things. 

After the sanctions took effect, the EBRD reported that the decline in exports of sanctioned VS non-sanctioned goods from the EU to Russia was 80% steeper for sanctioned goods. Furthermore, trade between the EU and Russia fell by a reported 66 billion dollars in March-December 2022-23 compared with the same period in 2017-21. 

While the effects of the sanctions rippled through the Russian economy, researchers picked up on an interesting trade pattern that emerged from Former-Soviet countries – also known as the FSU.   

Researchers noticed that exports of sanctioned goods from the EU to Armenia, Kazakhstan, and the Kyrgyz Republic – referred to in this paper and by researchers as the CCA3 – rose an additional 30% relative to the other goods that they were importing. This was an initial red flag researchers found in their 2023 report because the increase in exports to these countries almost perfectly coincided with the decrease in exports to Russia.

The sharp post-sanction increase in exports to these FSU countries coincided with an increase in exports from the same countries back to Russia. The researchers then identified two prominent forms of circumvention that allowed Russia to maintain access to the sanctioned goods. These methods were referred to as “re-routing and lost-in-transit” and, according to the researchers' 2026 report, offset ⅓ of the decline in direct European exports to Russia for the products outlined in the 2022-23 sanctions. The researchers used in-depth empirical trade data analysis to identify and draw conclusions about irregularities in trade between the EU and CCA3, and then between the CCA3 and Russia. To make these calculations, the researchers combed through the last 5 years of pre-sanctions trade to establish an accurate baseline for calculating changes in trade volume after the sanctions were enacted. In doing so, the researchers established a baseline for trade volume between the EU, the CCA3 countries, and Russia, then used their analytical approach to compare the amount of goods imported to the CCA3 and then re-exported to Russia, comparing the pre- and post-sanction volumes to establish the estimated difference. 

The working theory behind the sanctions, according to the researchers, was that the imposed economic cost on the sanctioned country would deter Russia from continuing the war. What the researchers found, however, was that Russia was able to offset roughly ⅓ of the decline in direct European exports to Russia that was caused by the 2022-23 sanction regimes.

In essence, Russia was unable to obtain certain goods from its usual European trade partners, leading it to increasingly rely on alternative trade routes through neighboring countries in order to maintain the pre-sanction flow of goods. The CCA3 countries began importing disproportionately large amounts of the same goods that were being sanctioned by the EU. From that point, the researchers were able to uncover the two methods that were able to offset ⅓ of the decline in European exports to Russia. The first was goods being imported to the CCA3 countries and then being re-routed to Russia, and the second being goods intended to end up in the CCA3 and then being marked as never having arrived in those countries – the methods described by the researchers as “lost in transit” trade. 

Once the extent of this scheme was uncovered, the EU in 2023 was able to tighten its transit routes and place further restrictions on the trade that helped to offset some of the circumvention linked to the “lost-in-transit” method. Although increasing the restrictions did not fully solve the circumvention problem, the policy response did seem effective in at least offsetting some circumvention. 

Although adjustments to the sanctions regimes placed on Russia were modified to prevent the continued circumvention of intentionally placed sanctions, Russia's subversion of these sanctions, along with the methods they used, raises a question about sanctions effectiveness and the continued economic interconnectivity of Russia and the FSU. 

Economic interconnectedness adds a layer of complexity for the FSU. If they were to deny Russia's request and withhold their economic infrastructure from Russia, they risk not only military retaliation, but possibly the loss of one of their own biggest trading partners. Furthermore, helping Russia also creates an isolating effect, as EU sanctions were then imposed on these EAEU countries for aiding Russia, creating a complex economic and geopolitical catch-22 that highlights that although FSU nations are separate states from Russia, their continued economic ties still give Russia significant influence over their international trade policy.