Over $1bn in EU exports that were targeted by sanctions has disappeared while transiting to Russia’s partners. This “ghost-trade” is what western officials think helped Vladimir Putin’s economy during the war.
Data from public sources revealed that only half of the $2bn worth of “dual-use” controlled items shipped by the EU reached their intended destinations in Kazakhstan Kyrgyzstan, and Armenia.
The EU has deemed these goods to be capable of being used for military or intelligence purposes and subject to export controls. They may have been imported directly into Russia from the EU, under the pretext that they were just passing through.
Baltic bordering countries with Russia and Belarus accounted for a disproportionate amount of ghost exports that never made it to their intended destination.
The items were sent in 2022, after Russia’s full scale invasion of Ukraine . At that time, sensitive EU trade with Kazakhstan Kyrgyzstan Armenia — three ex Soviet states now in a economic union with Russia — soared to unprecedented heights.
The discrepancy in records indicates that Russia may have avoided sweeping sanctions through middlemen, agents or other suppliers who put fake destinations on EU Customs Declarations. This technique has allowed Moscow to maintain access European products such as aircraft components, optical devices and gas turbines.
Erki Kodar asked, “Where else can it go?” Why would these countries suddenly require those goods now? Who in the region needs these goods most? “It’s Russia.”
According to data on imports, almost no goods sent by the EU to certain specific categories, such as gas turbines or soldering irons, have appeared to reach their intended destinations.
This missed trade highlights the difficulty of preventing Russia from accessing sensitive goods even when they are under the control of G7 nations.
“Some discrepancies are normal in the global trade mirror statistics, but these go beyond minor mistakes,” said Elina Rbakova, senior fellow at Peterson Institute for International Economics.
It took the financial industry almost a decade, and many billions of dollars in fines, to pay attention to sanctions. Why would export controls be different for companies?
Western efforts to tighten the sanctions have focused largely on loopholes surrounding re-export where goods are sent via a third nation. The ghost trade, in which items are lost during transit and never reach their final destination, is also a major economic stumbling block for Russia, according to analysis.
In February, the EU prohibited dual-use products from transiting Russia. This means that they can’t enter Russia directly, even if the final destination is another country.
Officials in the Baltic States fear that the ban is not enough to stem the flow of illegal drugs and are working to stop the smuggling on a national scale.
Lithuania wants tighter restrictions placed on a wider range of sensitive and dual-use goods, including advanced technology, aviation parts and other sensitive items. It also wants to prevent banned goods from being sent to Russia’s ally Belarus. Ministers are also looking into national measures that could prevent some items from leaving Lithuania.
Gabrielius Landsbergis said that the EU will need to have a great deal of “political courage” in order to take the necessary measures to enforce sanctions against non-compliant companies or countries. He said that Lithuania was ready to take steps at the national level to ensure sensitive technologies are not used in battle.
Estonians also support a total ban on transit of items leaving the EU. This includes not only dual-use products, but other categories of goods that are subject to restrictions and sanctions. “The question is if it’s better for there to be a complete ban on transit – with humanitarian exceptions. Kodar said that a complete ban is easier to implement than a list of open-ended items which keeps growing.
The real figure for Russia’s ghost import flow, which is likely to be much higher, is much higher. This $1bn figure only refers to a small sample of restricted products that could be matched to data on international trade flows.
If you add up all the EU trade in the first year following the start of the war in Ukraine, the difference between EU and Kazakh stats implies that $2.9bn in trade between the two nations has been lost.
In 2021, which was the last full calendar year before the invasion of Ukraine in its entirety, the equivalent amount was $450mn. The analysis confirms that the items subject to restrictions have a much higher likelihood of becoming ghost exports.
Heli Simola is a senior economist with the Bank of Finland Institute for Emerging Economies. He said, “This mirror data (matching import and export records) is never identical. But the discrepancies, and the sudden increase, tell you that there is something in it. There are actual exports to Kazakhstan. In some cases, it’s clear that sanctions are being evaded.”
All data are incomplete. Kyrgyzstan only has published data on trade up to October 2020. Most of the other countries’ data only goes up to December.
The figures do not include a separate, large amount of goods that appear to be arriving in Kazakhstan before being re-exported back to Russia.
Exports to Russia and Belarus have declined by about 40% since the sanctions were imposed at the beginning of the war.
The data suggests that there may be long-term issues with the abuses of transit rules. Since 2014, when Russia first invaded Ukraine and seized its territory, it has been under sanctions. This creates an incentive for Russia to abuse the transit exemption.
Lithuania sent $28 million worth of dual-use goods that could be tracked statistically to Kazakhstan in the 13 months before the war. The Kazakhs received only $9 million.
The full-scale invasion of 2022 has increased the volume and size of imports, as well as the flow. Lithuania sent $84mn in such goods to Kazakhstan during the first 13 months of the war. Kazakhstan reported only receiving $11mn. This means that Lithuania’s exports rose by $56mn, while its imports increased just by $2mn.
Kazakh officials have recently taken steps to prevent the re-export of goods into Russia. As a matter-of-principle, the Kazakh government has not joined sanctions. However, it is doing its best to protect its economy from their unintended consequences.
“That means that we take measures to prevent our territory from being used for circumventing these sanctions.” We maintain a regular, frank and open dialogue with our partners about this.