EU goods disappear in Russia’s ‘ghost trade’ -Dlight News

EU goods disappear in Russia's 'ghost trade'

More than $1bn of EU exports targeted by sanctions have disappeared in transit to Russia’s economic partners, a flow of “ghost trade” that Western officials believe has helped sustain Vladimir Putin’s wartime economy.

Public data analyzed by the Financial Times found that only half of a $2bn sample of controlled “dual use” items sent from the EU actually reached their intended destinations in Kazakhstan, Kyrgyzstan and Armenia.

These goods, which are considered by the EU to have potential uses for military or intelligence services and are subject to export controls, can enter Russia directly from the EU under the guise of transit only.

A disproportionate share of ghost exports, which never reached their official destination, left the EU from the Baltic countries bordering Russia and Belarus.

The items were sent in 2022 after Russia’s full-scale invasion of Ukraine, when sensitive EU trade with Kazakhstan, Kyrgyzstan and Armenia – three former Soviet states now in economic alliance with Russia – jumped to unprecedented levels.

Inconsistencies in the records suggest that Russia has circumvented broad restrictions on placing fake destinations on EU customs declarations by middlemen, agents or suppliers. This technique has helped Moscow maintain access to critical European products, including aircraft components, optical equipment and gas turbines.

“Where else can one go?” Estonian Minister Erki Koder asked for sanctions. “Why would those countries suddenly need those goods at this time? Who needs those goods the most in the region? It is obviously Russia.

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According to import data, for some specific categories of goods – including gas turbines, soldering irons and radio broadcast equipment – almost none of the goods sent from the EU reached their intended destinations.

The disappearance underscores the complexity of efforts to block Russia’s access to trade-sensitive goods, even if the items are subject to joint sanctions by the G7 nations.

“Some discrepancies in global trade mirror figures are not unusual, but these go beyond your typical small errors,” said Alina Rybakova, a senior fellow at the Peterson Institute for International Economics.

“It took almost a decade and several billion-dollar fines for the financial sector to start paying attention to sanctions. Why would companies be different with export controls?”

Western efforts to tighten sanctions have largely focused on loopholes around re-exports, where goods reach Russia via a third country. The FT analysis suggests that ghost trade, where goods go missing in transit and never arrive at their destination, has potentially been a major economic drag for Russia as well.

In February, the EU banned dual-use goods from passing through Russia, meaning they cannot enter Russia directly from the EU, even if they are destined for another country.

But officials in the Baltic states fear that the ban remains insufficient to stem the flow and are trying to crack down on smuggling at the national level.

Lithuania has pushed for tougher restrictions on a wide range of dual-use and sensitive goods, particularly advanced technology and aviation parts, and wants to stop banned goods being sent to Russia’s ally Belarus. Ministers have also started looking at national measures to stop some goods leaving Lithuania.

Lithuanian Foreign Minister Gabrielius Landsbergis said the EU would need a lot of “political will” to adopt the necessary measures to enforce the sanctions regime against non-compliant countries or companies. “We are ready to take national steps to ensure that sensitive technologies do not appear on the battlefield,” he said.

Estonians have also supported a complete ban on transit for goods leaving the EU, covering not only dual-use goods, but also other categories of goods subject to restrictions and embargoes. “The question is whether it is better to ban transit altogether – with humanitarian exceptions. It is easier to implement a complete ban than an ever-growing open-ended list,” Kodar added.

The true figure for Russia’s potential ghost import flows is significantly higher, as the $1bn only relates to a sample of banned goods that the FT was able to match with international trade flow data.

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Taking all EU trade together in the year since the start of the war in Ukraine, the gap between the EU and Kazakh figures suggests that $2.9bn of trade has been lost between the two countries.

In 2021, the last full calendar year before a full-scale invasion of Ukraine, the equivalent figure was $450mn. The FT’s analysis also confirms that items subject to sanctions are more likely to become ghost exports than other items.

Heli Simola, senior economist at the Bank of Finland’s Institute for Emerging Economies, said: “This mirror data. [matching export and import records] It’s never the same, but the anomalies and sudden spikes tell you there’s something to it. Kazakhstan has real exports. But in some cases it is clear that it is evasion of sanctions.”

No data is complete. Kyrgyzstan has only published trade data up to October 2022. Most of the data for other countries is only up to December.

The figures cited by the FT do not include a separate, larger flow of goods that appear to arrive in Kazakhstan and then be re-exported to Russia.

The increase in export-controlled goods from the European Union, with Kazakhstan listed as a destination, is now enough to account for a nearly 40 percent drop in exports to Russia and Belarus since sanctions were imposed at the start of the war.

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Data indicate potential long-term problems with abuse of transit rules. Russia has been subject to sanctions since it first seized Ukrainian territory in 2014, prompting the country to use transit exemptions to skirt the rules.

In the 13 months leading up to the war, Lithuania reported sending $28mn of statistically trackable dual-use goods to Kazakhstan, while the Kazakhs reported receiving only $9mn worth.

A full-scale invasion of 2022 has significantly increased the size of the flow — and the import gap. In the 13 months after the start of the war, Lithuanian data shows it sent $84mn worth of such goods to Kazakhstan, receiving only $11mn worth, meaning the country’s exports rose by $56mn during the period, but imports rose. $2 million.

The Kazakh government has recently taken measures against the re-export of goods to Russia. “As a matter of principle, we have not joined the sanctions as a government, although we are doing our best to protect our economy from this. [their] Unintended knock-on results,” said a senior Kazakh official.

“That means we are taking steps to prevent the use of our territory to circumvent these restrictions. And we maintain a regular and clear dialogue with our partners on that.”

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