The Kremlin's Parallel Network to Bypass Western Sanctions (2023)

Russia's economy is weathering all odds in the face of the Western trade encirclement.

A year ago, Russia dusted off the old sanctions evasion playbook. Since the invasion of Ukraine began and Western countries first restricted the activities of important companies and individuals in the Kremlin, the Vladimir Putin regime has used every possible technique to mitigate the impact on its economy. Each method is valid as long as the accounts are maintained. Diverting trade to Asia, significantly reducing energy prices, increasing public spending to record levels or coordinating with other countries used to dealing with this type of situation, such as Cuba, Venezuela, Syria, Iran or North Korea. Any actor is valid as long as he finds a safe conduct. For Putin, whose survival is at stake, there are no limits.

“The Kremlin was already familiar with the cat-and-mouse game of getting around sanctions before it invaded Ukraine in February. But it has since emulated the approach of other countries and, despite the restrictions it faces, has conducted international maritime and banking operations, in part through informal and illicit purchasing networks", according to a report by the International Institute of Research. Strategic ( IISS).“It will take time and come with a series of limitations and conflicting interests”, noted consultant Frank Umbach on the Geopolitical Intelligence Services website.

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The US, EU, UK and others have tried to impose more than 11,000 sanctions on Russian individuals, mostly oligarchs and senior state officials, companies, products and technologies in the past 12 stop the Kremlin's war machine in Ukraine.But against all odds, Russia persevered.. The exponential rise in energy prices and the rise of countries willing to exploit Russia's weakened position to make more gains from bilateral trade have given Putin some breathing room. However, these factors did not prevent the Russian economy from contracting 2.1% in 2022, according to official data from the state statistics agency Rosstat.

The forecasts were much darker.Experts predicted a drop of more than 10% in the face of successive rounds of sanctions. But it cannot be ruled out that the Kremlin makes up the numbers. In fact, the Russian government has already blocked public access to some of this data. “The sanctions did not cause a financial crisis in Russia, which explains why the economic contraction was smaller than expected. Furthermore, many Russian institutions have not yet been fully sanctioned and continue to benefit from access to international funding,” says Belgian thinker Tank Bruegel in a report published in October. "However, there has been an impact on the Russian economy in general." The impact of sanctions takes time to manifest itself, but it will do so in the medium and long term.

"It appears that the wide range of sanctions imposed on Moscow will remain in place for the foreseeable future, and indeed it will take years rather than months for Russian leaders to fully restructure the country's economy to avoid the worst effects." IISS report. By then, Russia will have enough capacity to withstand the shock.Its energy exports increased by 20% in 2022, according to official information. The International Energy Agency (IEA) estimates its benefits in this period at 200,000 million euros.

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The Kremlin maneuvered to divert its oil exports to China, Turkiye and India. With the latter, it has multiplied its export volume sixteen times since February 2022, according to IEA data. Russia also had the ability to establish ports in three different seas with its extensive fleet of oil tankers, increase export volumes through the network of available pipelines and strengthen its internal market protected from international sanctions. However, as Umbach points out, "the more Russia moves away from the globalized system, the more it will try to circumvent Western sanctions, relying on illegal, unconventional and opaque trading systems".

Russian travel companions

Dmitry Medvedev flew to Havana in November. Cuban President Miguel Díaz-Canel awaited the arrival of the former Russian president to replace Putin from 2008 to 2012, when the constitutional limit on the number of consecutive terms expired. The current deputy chairman of Russia's Security Council, who was once seen as a pro-Western liberal figure but is now one of the Kremlin's hawks, hailed Cuba's long-standing sanctions record. Diaz-Canel, who quickly condemned Western reprisals against Moscow "in the strongest possible terms", returned the gesture andshared with him some of his recipes for weathering the storm.

North Korea is another player that has closed ranks with Russia. Kim Jong-un's regime reportedly not only helped Putin find ways to ease Western sanctions that also weigh on its fragile economy, but also supplied the Russian military with weapons for its offensive in Ukraine, according to the Chamber. Defense Department spokesman John Kirby accused Pyongyang in November of funneling these arms shipments to Russia through third countries in the Middle East and North Africa. Satellite images seem to confirm this exchange of North KoreansArtillery shells are produced for Russian oil, gas and flour.

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Venezuela under Nicolás Maduro remains a key ally to evade sanctions. But this partnership is going through uncertain times. Washington's timid approach to Caracas, motivated by the need to find alternative sources of energy, threatens to remove Chavismo from Moscow's sphere of influence. "For Russia, Venezuela's flirtation with the United States threatens to lose one of its few loyal supporters in the world," says analyst Pavel Tarasenko of the Carnegie Endowment for International Peace. “Maduro has repeatedly accused the West of intensifying the conflict in Ukraine with the aim of “dismembering” and “destroying” Russia. He condemns Western sanctions against Russia as "insanity", while calling Ukraine's leadership a "neo-fascist elite". But the approval of the Biden administration is influencing the Miraflores Palace. The United States lifted some sanctions, sent a delegation to negotiate with Maduro and cooled ties with opposition leader Juan Guaidó, Venezuela's disgraced and self-proclaimed legitimate president who had been recognized by the United States in the Trump era.

Iran and Russia, isolated partners

The Ayatollahs' regime is one step ahead of the rest in its alliance with Russia. The newly appointed Governor of the Central Bank of Iran, Muhammad Raza Farzan, declared a few weeks ago that "the financial channel between Iran and the world is being re-established". The Persian economist announced in the same speechTehran and Moscow successfully concluded connect your banking infrastructuresamid increased Western sanctions against both countries. In the case of Russia, due to the invasion of Ukraine; in the case of Iran, due to the repression by the moral police of the mass protests after the death of the young Kurd Mahsa Amini.

SEPAM, the acronym by which Iran's financial telecommunications system is known, was linked to the Bank of Russia's Financial Message System (SPFS). These are the national systems to be replacedSociety for Worldwide Interbank Financial Telecommunication (SWIFT), the Belgian financial messaging and remittance system that connects more than 11,000 institutions worldwide. this system,where Iran and Russia were expelled from, allows banks and finance companies to transmit payment instructions and notify each other of transactions before they occur.

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Around 700 banks in Russia would be connected to around 100 banks in 13 other countries, mostly in Asia, and would be able to transact without relying on other foreign systems.This is an obvious sanctions evasion mechanism.. In return, Putin promised to accelerate Iran's entry into the Shanghai Cooperation Organization (SCO), an alliance designed to counter Western influence in Eurasia and focus on regional security issues, the fight against regional terrorism, ethnic separatism and religious separatist extremism.

The Russian system is unlikely to become a solid alternative to SWIFTwithout the initiative of other major economies like China or India. New Delhi does not favor such an operation due to its commercial ties with western countries. Indeed, even simply linking the Iranian system does not automatically improve banking relations with Iran. First, Russian banks need to decide whether to work with Iranian clients. In any case, Muhammad Raza Farzan's announcement came at a time of rapprochement between Tehran and Moscow. Bilateral trade hit records last year. Now both are looking to increase the use of their national currencies in these transactions to offset the impact of the US dollar and euro.

“Russian pro-Kremlin economist Sergey Glazyev even advocates limiting Western influence by establishing a new international monetary architecture, which he believes could be implemented through the BRICS,” says Portuguese analyst Miguel Garrido in Modern Diplomacy. In June 2022, Putin made exactly this demand at the summit of emerging countries:create a new international reserve currency under the aegis of the group. But it was not very successful among its members. The proximity of countries like India and Brazil to western countries blocks this route.

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China as preferred partner

"Russia and China are promoting an alternative vision of the international order that differs markedly from that of the United States and the European Union", summarizes analyst Mercy Kuo in the pages of The Diplomat. “Moscow and Beijing share dissatisfaction with the international liberal order. The two states have blocked attempts to maintain that order, particularly in the UN Security Council, and have promoted an alternative vision that reveres absolute sovereignty.The renewed "No Limits" friendship with China has led Russia to adopt the yuan as one of its main currenciesfor its international reserves, foreign trade and even some personal banking services to replace the dollar and euro, according to the Financial Times.

The accepted decisionin the wake of the move from Russia to ChinaCircumventing Western sanctions, which include freezing $300 billion of its international assets abroad, exposes the country to some risks.Beijing's shaky record of currency devaluations. According to the Central Bank of Russia, the yuan currently accounts for 16% of Russia's export payments. A little over a year ago, it was just 1%. This is the best possible news for Beijing, which is desperate to internationalize its currency.

Ultimately, Russia's vast oil reserves and its trade ties with India, and especially China, shielded the Vladimir Putin regime from the most damaging effects of Western sanctions yet. “They've had a tangible impact so far, but the biggest blow is yet to come,” argues Maria Snegovaya, a researcher at the Center for Strategic and International Studies (CSIS)."However, it is also becoming clear that sanctions alone will not stop Putin's aggression," he added.close Umbach.

“Yes, the disruption of trade with Europe and Russia's further integration with China and Iran would inevitably be one of the consequences of sanctions.But China and Iran will not fully replace what Moscow has lost in Europe.. Historically, most of Russia's business infrastructure has been centered in Europe, and moving to Asia poses serious logistical problems. In addition, there is not enough demand for Russian energy from Asia. In our report, we explain that the amount of oil that Russia can sell to Asia is limited: it cannot fully compensate for the loss of European markets. Likewise, what Russia imports from China and Iran to replace Western products tends to be of inferior quality,” replies Maria Snegovaya via email.

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“In recent years, in the post-2008 world, we have seen some broader anti-globalization trends. We saw the rise of populist politicians who emphasized the importance of economic protectionism and offered to protect their countries from globalization. We have seen countries adopt more protectionist economic policies.In that sense, this is not a new phenomenon."sagt Snegovaya.

“What is perhaps new is that Western politicians are realizing that this is the case.Globalization can pose serious risks to national security. Therefore, some degree of deglobalization is inevitable once the West realizes the threats associated with its strong interconnection not only with Russia, but also with China, which has received sensitive technology from the West. With that in mind, the Biden administration, for example, recently began restricting China's access to chip technology."

“In today's interconnected world, there is no alternative to globalization. And Russia is not excluded from this world, but sanctions force itto align their supply chains with alternative markets. One of the reasons there is no full oil embargo on Russia is that the West wants Russia to keep its oil stocks in energy markets (so as not to destabilize them) but sell them elsewhere at lower prices. The West will buy energy from other suppliers. Therefore, the main result of sanctions will be trade diversion rather than deglobalization,” says Atalayar.


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