Sanctions evasion helps Russia dominate former Soviet republics

Moscow’s blatant interference in the general elections in Georgia and Moldova demonstrates its determination to regain control over other former Soviet republics, despite its inability to install a pro-Russian regime in Ukraine.

In restoring its empire, the Kremlin also relies on extensive violations of Western economic sanctions to pull the South Caucasus and Central Asia states back into its orbit.

When Russia launched its full-scale invasion of Ukraine, the Western response was relatively swift. Sanctions were imposed, diplomatic ties were severed, and travel restrictions were enacted to weaken the Russian economy and diminish Kremlin influence across Eurasia. Paradoxically, however, Russia's current grip on much of the post-Soviet region appears to be tightening, raising pressing questions about the efficacy of Western policy.

Elections in Moldova and Georgia underscore the trend. In Moldova's October 2024 referendum on EU membership, the "yes" camp barely scraped by with a victory and narrowly won the presidential elections. Georgia's general election on Oct. 28 ended with the Moscow-friendly ruling Georgian Dream party claiming victory despite evidence of massive election-rigging.

Both countries have a political stratum that is increasingly dependent on Moscow for finances and influence operations. While fearful of defying Russia in the wake of its attack on Ukraine, they also profit significantly from the impact of evading Western sanctions on Russia.

Over 1 million middle-class Russians fleeing Vladimir Putin’s military mobilization and political repression were denied visas and entry permits to Europe and settled instead in the former Soviet republics. Georgia, Armenia, Kazakhstan and Kyrgyzstan were flooded with Russians possessing the resources and skills needed by their new host countries. At the same time, loopholes in the sanctions regime have transformed the Caucasus and central Asian states into sanctions-evasion hubs.

Bogus export-import schemes have boosted foreign trade figures, especially for imports of dual-use and other restricted goods. Local banks have witnessed soaring profits as intermediaries for Russian foreign trade. They have opened accounts for Russian nationals who were denied access to major international payment systems.

Several governments in Central Asia and the South Caucasus have claimed “neutrality” and refused to condemn Moscow’s aggression unequivocally. Political leaders also benefit from closer economic integration with Russia and growing dependency in various sectors, from defense to energy and agriculture. Kyrgyzstan is a stark case in point. Its exports to Russia increased almost threefold, from $384 million in 2021 to over $1,046 million in 2022. Imports from the EU skyrocketed almost ten times, with a marked rise in dual-use goods that can be used by Russia’s military-industrial complex.

Kyrgyz banks saw their non-interest income jump 359 percent in 2022, which has kept growing ever since. In January 2024 alone, Kyrgyzstan, a small landlocked country, imported almost 1 million euros of maritime equipment from the EU. In the first half of 2024, Russian foreign direct investment in Kyrgyzstan increased by 24 percent, making Moscow one of the largest investors in the country’s economy. Russians are building gold mines, wind farms and even a nuclear power plant.

Not surprisingly, Kyrgyzstan Prime Minister Akylbek Japarov has stated that “we are not afraid of any sanctions. Life goes on even with them." This was evident in August 2024 when the U.S. announced a new set of sanctions against Russia's financial sector and threatened secondary sanctions against Moscow’s international partners. The Kyrgyz government astutely circumnavigated the threat by creating an open joint stock company called "Trading Company of the Kyrgyz Republic.”

Hence, when the Kyrgyz Central Bank appeared to comply with U.S. stipulations by imposing a ban on bank transactions for foreign trade contracts without the actual delivery of goods — a loophole for most sanction-busting schemes that allowed goods to be resold to Russia — the regulation did not apply to authorized state companies. And the only designated company was the "Trading Company of the Kyrgyz Republic."

Such a scheme is a de facto nationalization of the sanctions-busting business worth hundreds of millions of dollars. Private companies that profited from sanctions evasion continue their operations through the national trading company. However, instead of paying a small bank commission, they will be paying the designated open joint stock company operator, which in turn uses the largest state-owned banks, such as Eldyk and Ayil, or newly created smaller banks for the transactions.

Sanctions evasion schemes pose a challenge for Western governments seeking to sever Russia’s economic lifeline for its military aggression even while maintaining trade ties with the Central Asian and South Caucasus economies. More pressure must be exerted on regional governments to reduce dependence on Russia or potentially face sectoral sanctions that cut off a range of technologies for business. Ultimately, by tightening sanctions against Russia and penalizing sanctions evasion by third parties, the U.S. Treasury Department’s Office of Foreign Assets Control will also help undercut Russia’s revanchist policies to dominate its neighbors.

Janusz Bugajski is a Senior Fellow at the Jamestown Foundation in Washington, D.C. and author of two new books: “Pivotal Poland: Europe’s Rising Power” and “Failed State: A Guide to Russia’s Rupture.”