Russia’s import-dependent economy is trying to gain access to foreign goods by any possible means. Who and how helps it in this?
The Russians do not hide that the fate of Iran and the Democratic People’s Republic of Korea (DPRK) awaits them. It is not by chance that Russian businessmen began to travel to Iran to study its experience.
The ability to circumvent sanctions is a matter of survival for the aggressor country. It develops the technological industry, produces modern weapons and avoids chaos in the foreign exchange market thanks to imports from “unfriendly” countries.
Russia has found a way to partially circumvent imports sanctions and trade with the world, financing the war in Ukraine. Who helps the Kremlin to circumvent sanctions and is it possible to close holes in them?
Import sanctions are one of the most powerful
Many companies have stopped importing goods to Russia since February 24. Some of them were affected by financial sanctions, some by the embargo on goods, and some decided to leave the toxic Russian market, severing supply chains.
Russian Deputy Prime Minister Andrey Belousov recently announced that imports into the country had decreased by 30%. This is one of the most serious blows to Putin’s regime. Why?
Firstly, due to the reduction of imports, the ruble rate strengthened significantly.
What is bad about this for the Russian authorities? The fact is that the economy of the aggressor country receives large foreign currency revenues from the sale of oil and gas, which it cannot spend because no one wants to trade with the Russians.
As a result, the dollar became useless on the foreign exchange market in the Russian Federation and quickly fell in price. Because of this, oil and gas exporters receive fewer rubles for each dollar raised, and the state budget does not receive the revenues provided for in it.
The report of the Ministry of Finance of the Russian Federation predicts that a barrel of oil in 2022 will cost 62 dollars at an exchange rate of 72 rubles per dollar. That is, the Russian economy should receive an average of 4,500 rubles from the sale of a barrel of oil.
However, the American currency costs 58 rubles, and Russian oil – 72 dollars. That is, 4,200 rubles are received from the sale of a barrel of black gold.
Therefore, the Russian currency cannot weaken thanks to import sanctions, and the budget and state funds cannot receive excess profits from the sale of oil.
More than 1,000 companies left Russia, but not all of them stopped doing business
Secondly, Russian enterprises are declining.
When foreign companies left Russia, they broke their supply chains. No one can restore them due to sanctions.
For example, the automobile company “AvtoVAZ” is forced to close factories and produce old models of cars. The reason is the cessation of supplies of spare parts and electronics.
The company reduced 2,000 workers at the plant in Izhevsk in September. Previously, this enterprise assembled the LADA Vesta model, and now it will produce only body panels and plastic components.
The Martur plant, which produced seats for French cars in Ulyanovsk closed, due to the exit of Renault from the Russian market. The fate of another 19 enterprises in the region that worked on this conveyor will be unknown.
According to the Russian Federal State Statistics Service, the production of cars fell by 89%, refrigerators by 52.3%, washing machines by 58.4%, and televisions by 49.7% in June, compared to the same month in 2021.
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Thirdly, the restriction of technological imports makes it impossible to produce advanced weapons.
It is about the modernization of armored vehicles, and the production of thermal imagers and drones.
For example, the largest truck manufacturer in the Russian Federation, the Kamaz company, lost suppliers of spare parts for cars of the fourth and fifth generations. Now the plant produces models of the third generation, that is, from the 1960s.
Russian factories cannot assemble tractors without imported components, which are actively used by Putin’s army.
Fourthly, Russian consumers feel the reduction of imports themselves.
The strengthening of the ruble should make imported goods cheaper, but everything turned out the other way in Russia. Goods from abroad are becoming more expensive due to broken logistics chains, sanctions, and shortages in the market.
Imported spare parts for cars went up in price by 45-60%, laptops and smartphones – by 30-70%.
Household appliances are traded at such a price as if the dollar is not worth 60 rubles, but 90 rubles. The same washing machine model in Poland is one and a half times cheaper than in Russia.
Sanctions were also imposed on other goods. Even if Russia produces them, it is not able to supply the whole country with them. The gap was compensated by imports in peacetime, and after the introduction of sanctions, the flow of goods stopped and a deficit arose.
Prices for strong alcohol in Russia have increased by 20% due to the loss of a third of imports from Western brands. Office paper rose in price by 50% because companies stopped supplying their stationery and pulp.
The introduced sanctions work effectively, but Russia can arrange the supply of sanctioned products through third countries and lay new logistics routes. Parallel import helps the aggressor in this.
How parallel import works
For example, the company stopped supplying whiskey to the Russian Federation, but a hotel in Moscow needs it. Then the hotel employees go to a neighboring country, buy a batch of whiskey from local distributors and bring it to Russia. This is a parallel import.
Parallel import has been prohibited in Russia since 2002, so that foreign manufacturers have the exclusive right to trade their products, invest more actively and establish direct supplies.
Now, more than 1,000 large companies have left the Russian market, so this norm has lost its meaning.
Parallel import has many problems. Purchases are often made in small batches, so prices for goods are higher than in wholesale trade.
If large batches are needed, then you have to adjust the routes yourself. Such logistics will be unstable, long, expensive and will require many intermediaries.
The Russian publication Meduza reported that instead of ten weeks, the transportation of chips to the Russian Federation now takes 60 weeks, and car spare parts reach the local market in just two months.
Previously, companies bought goods from the warehouses of official distributors who took care of delivery. They did everything on time and predictably, now every Russian importer is on his own.
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Companies are forced to look for ways to supply goods from other countries, instead of one drive to the warehouse. They make many deals with different suppliers, terms and risks. At the same time, not all logistics chains work stably.
Logistics through intermediaries is more expensive.
According to Igor Berezin, president of the St. Petersburg Guild of Marketers, the cost of shipping containers to the Russian Federation has tripled. Moreover, sellers require a larger upfront payment, which makes the scheme unattractive for small businesses.
These are far from all problems. The parallel import loophole makes it easier for a counterfeit to enter the market. It is difficult to distinguish the original from a fake without the official participation of the manufacturer.
There is also a problem with complex equipment.
Some Samsung smartphones imported through parallel import do not work in Russia – they are blocked remotely. The warranty of the equipment must now be provided by the store, which otherwise sells it at a large discount.
Chaos reigns in Russian imports, but the aggressor country may establish new routes for supply later. Even Western manufacturers who are looking for sales markets can help to develop new chains.
Iran partially established its parallel import while being under sanctions.
This country has learned to use the black market and uses many tools for supplies: from the medieval hawala system, which involves the exchange of money through a network of brokers, to payments in cryptocurrencies.
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Russia is trying to imitate the experience of Iran. The first vacancies of parallel import specialists appear on Russian job search services.
You can see advertisements of logistics companies that specialize in the parallel import of goods from the EU on the Internet.
The Russian Federation expects that the volume of parallel import will amount to $20 billion from May to December. If the plan is implemented, the Russians will be able to compensate for about a fifth of the lost supplies.
However, even this $20 billion is dangerous, because Russians can import critical components and equipment. We are talking about electronics and dual-use goods that will work for the Russian military industry or keep a number of sectors of the Russian economy afloat.
It is necessary to make life as difficult as possible for Russian importers to stop the flow of goods. That is, to influence the companies of those countries which help the aggressor to circumvent sanctions.
Which countries help Russia
Exports of smartphones from Kazakhstan to Russia increased by 2,100 times, microprocessors and controllers – by 121 times during the first half of 2022. This country began to supply its neighbor with microchips, cameras, flash drives, and household appliances.
Kazakh authorities conflict with the Kremlin and have repeatedly stressed that they do not plan to help Russia circumvent sanctions. However, so far the country is one of the most convenient hubs for Russian importers.
It is possible to trade with the Kazakhs in national currencies, and their warehouses are relatively close to the Russian market.
Other countries of the former USSR also help Russia with import. Imports to Russia from Georgia increased by 39%, Uzbekistan – by 74%, Kyrgyzstan – by 100%, and Armenia – by 133% in July, compared to the same month in 2021.
Large foreign players are leaving the Russian market, and neighboring countries are taking their niche.
Turkey saturates the Russian market with its goods and is a hub for circumventing sanctions.
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Russian logistics company Avrora Logistic has described to its customers four schemes for the delivery of goods from the European Union through Turkey. The firm emphasizes that these schemes work even for goods that have fallen under sanctions.
First: the goods are bought by a Turkish company, and on the way, they are repurchased by a Russian company and taken to the Russian Federation.
Second: the goods are allegedly transiting through Russia to Turkey, but while they are traveling on the roads of the Russian Federation, they are bought by a Russian company.
Third: the goods first are delivered to Turkey, and then a Russian company buys them from the customs warehouse.
Fourth: the goods are delivered to Turkey, cleared by customs there, certified, and then resold in the Russian Federation.
All schemes involve higher transportation costs, but they work, and Russian logistics companies already provide such services.
Russian importers need access to the hub ports of China and the UAE to supply large quantities of goods. These countries also participate in parallel import and can play a significant role in circumventing the embargo.
There should be more sanctions
Analysts of the Kyiv School of Economics calculated that Western countries had imposed sanctions against only 25% of Russian imports by July 21.
If the embargo is not stricter and does not cover a larger range of goods, Western companies can help the Russians establish new ways for parallel import.
Even if manufacturers do not officially return to the Russian Federation, they can organize hubs in neighboring countries for the needs of the Russian market.
The official extension of the embargo to a larger number of goods will help close these loopholes, and companies that help Russia circumvent it should be subject to secondary sanctions.
Western countries use the instrument of secondary sanctions inactively, but their potential is high, first of all – as a preventive measure.
“We have seen how secondary sanctions work even before their official introduction for the last week. The US announced its intention to increase pressure on Turkish banks that have become participants in the Russian payment system “Mir”.
The United States imposed sanctions against the head of this system. Two Turkish banks, İşbank and Denizbank, announced the suspension of work with the “Mir” payment system four days later.
Later, Russian media reported that Kazakhstan, Vietnam and Armenia also stopped using the system,” said Yulia Pavytska, an analyst of the Kyiv School of Economics.
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The US has been practicing secondary sanctions for a long time. The country threatens CAATSA sanctions against all countries that will buy modern Russian weapons.
The threat of such sanctions disrupted Russian contracts in some “neutral” countries for the supply of Su-35 fighters and S-400 air defense systems.
Trade isolation of Russia is one of the most reliable ways to deprive the aggressor of budget revenues and military technologies. That is why it is necessary not only to expand the sanctions but also to make impossible any ways of circumventing them.