By Galina Korol | 2024-02-06

KYIV -- The recent arrest of three suspects accused of smuggling goods to Russia that could have military uses is the latest evidence that Russia is attempting to evade sanctions.

Coordinated raids in five countries led to the arrests, European Union (EU) judicial agency Eurojust said January 23.

Authorities in Germany, Latvia, Lithuania, Canada and the Netherlands conducted a joint investigation into the export of technological and lab equipment that contravened EU-wide sanctions imposed after Russia's invasion of Ukraine.

Dutch police began the probe at the end of last year, which led to the uncovering of "a web of enterprises which were used to circumvent the ban on exports to Russia," according to Eurojust.

Two men in their 50s were arrested on suspicion of being the directors of the Dutch firm shipping goods to Russia via Eastern Europe, said the Dutch tax authority FIOD.

A 54-year-old woman was also arrested on suspicion of assisting in the operation.

The goods smuggled were worth hundreds of thousands of euros, Dutch public broadcaster NOS said.

The EU already has hit Russia with 12 rounds of unprecedented sanctions since the Kremlin launched the war on its neighbor in February 2022.

Brussels aims to impose a new round of sanctions on Russia in February to mark the second anniversary of the invasion of Ukraine, an EU official said in mid-January.

However, Moscow managed to import $1 billion worth of advanced US and European chips in 2023, according to classified Russian customs statistics cited by ND (Donbas News), a Ukrainian publication.

Russian imports of semiconductors and integrated circuits totaled $1.7 billion for the year, with more than half of them produced by companies from the United States and EU, according to the documents.

"The Russians are using deception to transport sanctioned electronics through third countries. Most of these high-tech components later end up in Russian military goods," ND reported in late January.

Sanctions evasion

Russia circumvents sanctions by going through China, Hong Kong, Türkiye and Kazakhstan, according to observers from the KSE Institute of the Kyiv School of Economics.

Middlemen play the main role in evading sanctions, according to an assessment published by the institute in January.

Thus, "the selling company may not even know that the goods never reached the end customer specified in the contract," said Yelena Belousova, a senior consultant at the institute.

"When, for example, an EU company sells something... to Kazakhstan, and the supply routes pass through Russia, the goods are sent by truck [from the EU] and unloaded somewhere in Russia," Belousova told Kontur.

Russia may be buying up existing companies or deliberately registered companies long ago in preparation for such trade someday, Belousova said.

Some Russian schemes for circumventing the embargo are not actually as complex as they seem at first glance, according to journalist Bogdan Miroshnichenko, who conducted his own investigation for the Ukrainian publication Economic Truth on how Russia is importing parts for microchip fabrication equipment.

His investigation focused on ASML, a Dutch company that holds a leading and virtually monopolistic position in the market for chip fabrication equipment.

"These machines can also allow production of large microcircuits that can even be used in certain types of weapons: tanks, possibly trucks, perhaps less advanced models of missiles," Miroshnichenko told Kontur.

Russian firms continue to import ASML equipment into their country, even though the Dutch company has not sold its state-of-the-art lithography machines to Russia since 2014, he found.

"I wrote to ASML's press office. They were surprised, to put it mildly... In this case, the manufacturer truly absolutely is not to blame, because this is equipment that has been wandering somewhere in Asia for decades and it cannot control this," Miroshnichenko said.

Russia uses Asia's secondary market and online marketplaces to simply buy the spare parts it needs from old machines, said Miroshnichenko.

The ASML situation is just the tip of the iceberg, he said.

"There is no problem clearing customs if a country has not imposed sanctions or has introduced rather weak sanctions, or say, they [Russians] buy sanctioned goods through a company in the United Arab Emirates [UAE]," said Miroshnichenko.

Whom to punish and how

While Russia is still importing sanctioned goods, the sanctions certainly have made it harder for it to obtain them, according to Alexander Kovalenko, a military and political correspondent with InfoResist.

"If there were no sanctions, there would be no smuggling: instead, there would be open deliveries of these spare parts and equipment, and the volumes would be completely different," Kovalenko told Kontur.

"Direct imports are always much larger than smuggling."

Figuring out how who is accountable for sanctions evasion is another problem.

"For example, a company from Canada sells some equipment to Eritrea, and from Eritrea it is sent and resold to the UAE. From there it is resold to Armenia, and from Armenia to Russia," said Kovalenko.

"So in this instance, who should be held accountable? It is a very difficult question to determine which of these companies, which one of them specifically, is playing the main role in smuggling this equipment to Russia."

Stronger enforcement is needed, say some observers.

"Current laws on violating trade sanctions do not give us an immediate reduction of these goods entering Russia," said Belousova, the consultant.

"Companies often lack adequate procedures to restrict such trade. Often the supply route includes some irresponsible distributor who will deliver to Russia," she said.

"To prevent this from happening, we recommend increasing companies' liability, thereby encouraging them to introduce more internal procedures for scrutinizing their customers and their customers' customers, and to carry out appropriate procedures to learn precisely to whom they are selling their products and components."