EU goods worth at least $1bn vanish in Russia ‘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 analysed by the Financial Times found that only about half of a $2bn sample of controlled “dual use” items shipped from the EU actually reached their stated destinations in Kazakhstan, Kyrgyzstan and Armenia.

These goods, which are deemed by the EU to have potential uses for military or intelligence services and are subject to export controls, may have entered Russia directly from the EU under the pretence that they were only passing through.

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

The items were dispatched in 2022 after Russia’s full-scale invasion of Ukraine, when sensitive EU trade with Kazakhstan, Kyrgyzstan and Armenia — three ex-Soviet states now in an economic union with Russia — surged to unprecedented levels.

The mismatch in records suggests Russia has sidestepped sweeping sanctions by middlemen, agents or suppliers putting fake destinations on EU customs declarations. The technique has helped Moscow maintain access to crucial European products, including aircraft components, optical equipment and gas turbines.

“Where else could it go?” asked Erki Kodar, Estonian minister for sanctions. “Why would those countries suddenly need those goods at this time? Who needs those goods the most in the region? It’s obviously Russia.”

For some specific categories of goods — including gas turbines, soldering irons and radio broadcast equipment — almost none of the items sent from the EU appear to have reached their purported destinations, according to import data.

This missing trade underlines the complexity of efforts to close off Russia’s access to sensitive goods, even when the items are subject to concerted restrictions by G7 nations.

“Some discrepancies in global trade mirror stats are not unusual, but this is beyond your typical minor errors,” said Elina Ribakova, a senior fellow at the Peterson Institute for International Economics.

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

Western efforts to tighten sanctions have largely focused on loopholes around re-export, where goods reach Russia via a third country. FT analysis suggests the ghost trade, where items go missing in transit and never arrive at their destination, has potentially also been a big economic crutch for Russia.

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

But officials in Baltic states fear the ban remains insufficient to stem the flow and are trying to stop the smuggling at a national level.

Lithuania has pushed for tighter restrictions on a broader range of dual-use and sensitive goods, in particular advanced technology and aviation parts, and wants to stop banned goods being sent to Russia’s ally Belarus. Ministers have also began looking at national measures to stop some items from leaving Lithuania.

Gabrielius Landsbergis, Lithuania’s foreign minister, said the EU would need a lot of “political will” to adopt the measures necessary to enforce the sanctions regime against non-compliant countries or companies. “We are ready to take national steps to make sure sensitive technologies do not appear in the battle field,” he said.

The Estonians have also backed a complete ban on transit for items leaving the EU, covering not just dual-use goods, but also other categories of goods subject to sanctions and restrictions. “The question is whether it’s better to have a full ban on transit — with humanitarian exceptions. It’s easier to implement a full ban than an open-ended list that keeps growing,” Kodar added.

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

Taking all EU trade together in the year after the war in Ukraine started, the gap between the EU and Kazakh statistics implies that $2.9bn of trade has gone missing between the two countries.

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

Heli Simola, a senior economist at the Bank of Finland Institute for Emerging Economies, said: “This mirror data [matching export and import records] is never identical, but the discrepancies and the sudden surge tells you something is in there. There are real exports to Kazakhstan. But in some cases it is clear that it is sanctions evasion.”

None of the data is complete. Kyrgyzstan has only published trade data up to October 2022. The bulk of the data from other countries only runs up to December.

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

The surge in export-controlled goods from the EU with Kazakhstan listed as the destination is now enough to make up for about 40 per cent of the decline in exports to Russia and Belarus after the imposition of sanctions at the start of the war.

The data hints at possible long-term problems with the abuse of transit rules. Russia has been subject to sanctions since it first seized Ukrainian territory in 2014, creating an incentive for the country to use the transit exemption 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.

The 2022 full-scale invasion has significantly increased the size of the flows — and the import gap. In the 13 months after the war began, Lithuania’s data shows it sent $84mn of such goods to Kazakhstan, which reported receiving just $11mn worth, meaning stated exports to the country rose by $56mn over the period, but stated imports increased by just $2mn.

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

“That means we are taking measures to prevent the use of our territory for the circumvention of these sanctions. And we maintain regular and frank dialogue with our partners on that.”

Source: Economy - ft.com