Are Sanctions Working?
Strict sanctions enforced on Russia by Western nations have become even more stringent in the wake of the Russian invasion of Ukraine. Yet the subsequent economic collapse predicted by some has not materialised, and the Russian economy seems to be quite resilient. This means that the Russian government can continue to fund its war effort and prolong an already lengthy and bloody conflict.
But the resilience of the economy still does not explain how exactly Putin’s regime is able to purchase sanctioned goods like the technology required for military operations (e.g. microchips used in the production of drones and missiles). Such tech, as to be expected, has been made unavailable for Russian purchase by the West.
At least, that is, by legal means.
How Does Russia Evade Sanctions?
Pavel Verkhnyatsky, a representative of the International Working Group on Russian Sanctions (“IWGRS”) states that the most often used method to evade sanctions is the simplest.
Cash.
These funds most likely come from oil and gas sales and are then kept in countries where sanctions are not strictly enforced. Two of the most prominent examples of such jurisdictions are the UAE and Turkey.
The UAE is particularly noteworthy here, as Russian money has led to a luxury real estate boom in Dubai. It’s also worth pointing out that the properties bought by Russians tend to be paid for in cash.
One way in which Russia specifically acquires sanctioned goods such as weapons or military technology is through networks of shell companies, a common form of cover for Russian intelligence services. These entities then purchase the sanctioned goods required.
These shell companies are often based in countries with close ties to Russia, such as Kazakhstan and Armenia.
What is the Scale of Russia’s Secret Finance Activities?
Russia’s illicit finance activities go beyond financing its war effort and also fund the masses of associated disinformation and political interference.
Research from the University of Exeter warns that illicit financing will give Russia a significant advantage in its war against Ukraine, citing the Wagner group as an example of illegal financial activities and military operations being interconnected.
Dr. Tena Prelec states that, although sanctions and increased scrutiny have made Russia’s illicit financial activities harder to pull off, Russia has still managed to do so, using tools such as “opaque transactions, cash payments…and non-Western financial centres”.
The research also adds that this illicit financing could become so much of a norm that it becomes an institution in of itself, and will run parallel to current, legitimate financial institutions, despite the clear violation of international law.
TenIntelligence Thoughts
The sophisticated network of illicit financing that Russia has built up should also increase your wariness of dealing with companies in jurisdictions both sympathetic towards and geopolitically intertwined with Russia. Examples of these jurisdictions include Kazakhstan, Armenia and Kyrgyzstan.
As mentioned before, Russia operates whole networks of shell companies. This means that it is wise to be thorough when conducting due diligence on a company in any region. For example, a company based in the UAE may not have an obvious Russian connection, but maybe a Kazakh entity holds shares in the company, or a director of the UAE company is also a director of a shell company in Armenia.
Carrying out due diligence in these jurisdictions may prove more difficult than in Western jurisdictions, but the high level of risk they pose makes it absolutely necessary.
With a variety of OSINT methods we can use and the ability to perform research in a variety of languages, including Russian, we can provide our clients with the security and assurance they need in carrying out their due diligence.
Sources used:
- Russia uses cash and diamonds to avoid sanctions and finance military programs | Вита Свирневская
- Prices start at 10 million: the place where Russians have contributed to a boom in the luxury real estate market | Вита Свирневская
- Continued use of illicit finance by Russia threatens international security and democracy new report warns | Kerra Maddern
Written by:
James Weeds | Analyst at TenIntelligence