Russia is seeking to copy Iran’s tactics in evading Western sanctions imposed on Moscow since its February 2022 invasion of Ukraine, according to a report from Britain’s Royal United Services Institute (RUSI), published June 6.
Ukraine’s allies, including the United States, the European Union, Britain, Canada, Japan, Australia and New Zealand, have imposed successively tougher sanctions on Russia, initially since its forceful annexation of Crimea in 2014.
The measures have been significantly tightened since the full-scale invasion of Ukraine, targeting the Russian Central Bank, its finance and military-industrial sectors, alongside the country’s significant oil and gas exports. Individuals close to Russian President Vladimir Putin and the military have also faced asset freezes and travel bans.
The RUSI report, titled “Developing Bad Habits: What Russia Might Learn from Iran’s Sanctions Evasion,” says that “evidence is emerging of adaptations in Russia’s
financial and trade strategy.”
“Examples include the switching of ownership of companies and properties to family members or affiliates, the use of trading companies to source foreign exchange to avoid the sanctions imposed on the Central Bank of Russia, and import substitution. … Alongside these steps, Russia is now gravitating further towards other states that have faced similarly sweeping restrictive measures or that facilitate sanctions evasion, to learn best practices, secure necessary services and establish trade relationships,” the report says.
In a televised speech on June 4, Ukrainian President Volodymyr Zelenskyy warned that Russia is using a network of suppliers to evade international sanctions designed to prevent it from making missiles and other weapons.
“Unfortunately, the terrorist state manages to obtain the technologies of the world through a network of suppliers, manages to bypass international sanctions,” Zelenskyy said. “And we must close all such routes — together with our partners — so that there are no products of the free world in Russian missiles, in Russian weapons.”
He added, “Necessary steps will be taken.”
Russia has procured drones from Iran and has used them to attack cities across Ukraine.
“In response — and demonstrating the seriousness with which Ukraine’s allies are treating this growing relationship — Western allies are increasingly targeting Iranian entities with sanctions,” the RUSI report says.
Russia is rapidly learning to adapt to the sanctions, said Tom Keatinge, a co-author of the report.
“In particular, sourcing the kind of electronic components they need to support their military, that's the first thing," he told VOA. “The second thing is obviously, they've had to look for new markets for their hydrocarbons, their oil exports. That’s a key revenue generator for the country.”
Russia said its economy shrank by 2.1% in 2022 — less than many expected —although some analysts question the reliability of the government figures.
Meanwhile, imports of Russian crude oil by China and India hit an all-time high in May. Analysts said buyers took advantage of discounted prices. In December, Western nations imposed a price cap of $60 per barrel on Russian crude oil. The U.S. Treasury said that has resulted in a more than 40% drop in oil revenue in the first quarter of 2023.
The sanctions only apply to Western governments and companies trading with Russia.
“And therefore, if you're a bank in India, you can perfectly well have a financial connection with a Russian bank,” Keatinge said.
Nevertheless, most global trade is still conducted in U.S. dollars. So, how has Russia circumvented attempts to strangle its economy?
Keatinge said the Kremlin is increasingly looking to Iran as a model on how to evade sanctions. Tehran has been subject to various Western sanctions since 1979 over its nuclear and missile programs and its support for terrorist groups, which Iran denies.
“Iran — as a hydrocarbon economy trying to export oil — has learned a lot of tricks over the recent years that we do see Russia start to employ. So, for example, shadow fleets of tankers — so this kind of switching oil between tankers in the middle of the night, with location devices switched off. But also using front companies in places like Turkey or the UAE to try and hide the origin of trade,” Keatinge told VOA.
Last month, Russia's second-largest bank, VTB, opened an office in Tehran. The two countries have begun connecting their financial systems to facilitate transactions outside the global SWIFT payment system. Russian banks were ejected from the SWIFT network in the wake of Moscow’s invasion of Ukraine last year, while Iranian banks were first excluded in 2012 before being readmitted four years later as part of the JCPOA nuclear agreement. Iran was again ejected from SWIFT in 2019, following the reimposition of sanctions by then-U.S. President Donald Trump.
The RUSI report draws parallels between the Iran-backed militant group Hezbollah, which is a U.S.-designated foreign terrorist organization, and the Wagner Group, a private army with close links to the Kremlin.
“Iran’s funding and resourcing of Hezbullah is reciprocated in numerous ways, including through support for the state’s intermediary oil trading schemes. Such joint ventures or marriages of convenience between rogue states and their proxies may possibly be mirrored in the ways in which private military companies patronized by Russia advance Russian interests (and enable the circumvention of sanctions) globally,” the report says.
How can Ukraine’s allies prevent Russia from evading the sanctions? The private sector is the front line of compliance, Keatinge noted.
“The private sector has had to scramble to get itself in a position to ensure that it knows who its customers are, it knows who it's exporting things to, it knows what's allowed and what's not allowed. And so, the result is that there are huge gaps in the system,” Keatinge said.
“We see that in the way that companies are still exporting electronics to places like Kazakhstan and celebrating the fact that their exports have gone up without thinking that perhaps Kazakhstan is just a cutout on the way to Russia,” he said.
The report urges the West to educate the private sector on detecting illegal trades. It warns that Moscow will increasingly seek to use Iran’s playbook as it tries to circumvent sanctions.
“We need to look at countries like Iran to learn how did they shape-shift, how did they change, (in order) to anticipate what Russia might do. There has been a lax attitude towards sanctions, particularly across Europe, in the years gone by. And that has to change,” Keatinge said.