How Russian companies circumvent Western sanctions

The history of the Siemens turbines in the Crimea demonstrates the weakness of sanctions and the ingenuity of business.
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From the very beginning of the introduction of sanctions in 2014, Russia in a roundabout way receives the necessary imported goods and finances, while foreign business is actively trying to stay in the Russian market through political barriers. About why the new sanctions will not work.

 On July 5, Reuters reported that Siemens gas turbines had been delivered to the Crimea. The equipment was there, despite the EU sanctions, which prohibit European companies from selling energy technologies to the peninsula. These turbines were produced at the Siemens Technologies Gas Turbine plant, a joint venture of Silovye Mashiny (35%) and Siemens AG (65%), located near St. Petersburg.

Power Machines belong to the Russian oligarch Alexei Mordashov, who almost completely owns this asset after Siemens sells a blocking stake (25% + 1 share) to Highstat Limited. He also owns a large steel and mining company PJSC "Severstal".

According to representatives of the German concern, the Russian state engineering company Technopromexport, the daughter company of the state corporation Rostek, was responsible for purchasing the equipment. In 2015, turbines were purchased allegedly for the needs of power plants in Taman, although even then some media wrote that the equipment was intended for the Crimea. Suspected of this, Siemens stopped deliveries for Technopromexport - the turbines were already on hand, but without additional equipment they did not work. After the turbine decided to sell at auction. But in 2017 four turbines were in the seaport of Sevastopol after the "modernization". A special rework of the equipment - that it would work without additional supplies from the German side - was engaged by Interautomatica CJSC.

As a result, Siemens took maximum steps to avoid punishment from the European Union for violation of the sanctions regime: on July 11, Siemens filed a lawsuit with the Moscow Arbitration Court to return equipment from the Crimea. Also, the German company initiated investigations into what happened, withdrew from Interautomatica CJSC, where it had a 4.5% stake, offered Russia to buy out those same turbines and stopped supplying new power equipment to Russian companies.

A number of analysts suggest that many people will take to meet Russia's demand for power equipment: for example, American General Electric, Italian Ansaldo or Japanese Misubishi Hitachi Power Systems. Nevertheless, recently the Ministry of Energy announced its intention to oblige suppliers to transfer to them program codes for turbine control. This necessary element in the functioning of technology is a trade secret. Most likely, this is not necessary to disclose the secrets of companies, but to exclude such situations, as with Seimens.

How to avoid sanctions

Foreign companies have come up with different methods for circumventing sanctions. One of them is the choice of intermediaries - those who did not fall under the sanctions. For example, for some "sanctions" supplies, the way from Western companies lies through exports to Brazil and Turkey - countries that did not participate in the agreements on the ban on trade and cooperation between the EU and the US with Russia. Some "dual-use" products are produced in factories in China and India.

Sometimes third-party Russian firms order from foreign partners exactly the same thing as those who were banned by the state-owned company. Such situations the manager of one of the French firms-suppliers describes as follows: "They asked exactly the same products as our previous client, they knew the specification, the price and with whom it is necessary to talk about it. We conducted a quick check and found out that no shareholder from the register of this company is included in any blacklist. That's all we can do, although in general we can guess what's going on here. "

However, the already mentioned cooperation through intermediaries still works. Under the pressure of sanctions the Crimea, despite a formal significant reduction in its foreign trade turnover by 90%, in practice quietly receives the necessary goods. Thanks to Russian companies that provide services for the transport of goods on the peninsula, you can find almost any "banned" - from food and agricultural products to household appliances. For example, goods for the Crimea are delivered by St. Petersburg and Novorossiysk carriers, and the port of Novorossiysk is gradually increasing the volume of cargo turnover - from 121.5 million tons in 2014 to 131.4 million in 2016.

Cooperation in such a key area as energy, does not easily come off the hands of Western companies. July 20, there was news of a $ 2 million fine imposed on the oil company ExxonMobil by the US Treasury Department. The reason was the continued cooperation of foreign oil companies with Rosneft state corporation Igor Sechin, with which in 2014 an agreement on services for drilling, production and transportation of hydrocarbons by the Sakhalin-1 consortium was signed within the framework of the Far Eastern LNG project. The subsidiary company ExxonMobil - Exxon Neftegas Limited is part of the Sakhalin consortium.

Despite the risks, they continue to work with Russia and in the banking sector. US financial institutions JP Morgan and Goldman Sachs through subsidiaries actively work with Russian business.

There are also reverse situations: in April the Financial Times learned about Russian brokers trading in prohibited securities. It turned out that the financial organizations "Discovery" and "BrokerCreditService", having offices in the US, are working with the shares of Mostotrest, Mosoblbank and bonds of Uralvagonzavod. These companies (the first two are connected with Arkady Rotenberg) are on the black list of the US Treasury. Adam Smith, a former senior adviser to the US Treasury's Office of Foreign Assets Control, believes that Russian brokers can get on the sanctions list, but their representatives say they work exclusively under the laws of Russia and the United States. So quotes FT one of the Russian brokers: "Sanctions are no longer effective, no one punishes those who do not obey them. Western banks ask whether we observe sanctions, put a tick in the questionnaire and forget about it. "


After the sanctions of 2014, the volume of direct investment in the country fell sharply: from $ 69 billion to $ 21 billion. However, business was too interested in the Russian market. In 2016, the amount of money deposits from Germany was about € 1.78 billion. Among the investors were Claas agricultural machinery manufacturers, the Deutsche Milchkontor dairy company and Bionorica pharmacists, and joint ventures such as the Russian-German EkoNiva. However, it is not known whether the scandal with Siemens will affect business in other industries - direct bans on cooperation from the German authorities or the reputational costs of companies.

 The Bahamas and Bermuda Islands were the leaders in terms of direct investment. They invested in Russia about a quarter of the total amount of financial injections in 2016, which amounted to $ 8.2 billion. The representative of the audit company SK Group Dmitry Vodchits believes that these offshore jurisdictions are used primarily by American companies to bypass the prohibitions on working with Russian business.

New sanctions, which the US Congress recently introduced against Russia, hit mainly in the same energy sphere where US companies have significant interests, Russian economist Andrei Movchan believes.