Managing rising sanctions risks across the South Caucasus and Central Asia

  • Sanctions risks are on the rise across the post-Soviet space as Russia seeks to set up supply chains for “parallel imports”, including for sanctioned goods and services.
  • Russia will be tempted to pressure its neighbours to ensure closer economic cooperation and this could include activity that exposes companies to sanctions risks.
  • Foreign companies in the South Caucasus and Central Asia should be prepared for the possibility that their regional partners or even local offices may deliberately or unwittingly consider sanctioned business activity with Russia.
  • Due diligence may need to extend beyond your immediate counterparties in the region to also consider these counterparties’ clients, and thus allow you to better understand the risk of diversion to your goods and services.
  • Training and education for local offices and partners is also recommended to ensure people understand the limitations that sanctions create and the ways in which risks can be identified.

 

Russia has scrambled to soften the impact of the sanctions imposed on it since early 2022, including through “parallel imports” – essentially, procurement through third countries – despite all the drawbacks of this approach, such as logistics premiums, insurance problems, and limited supply. This situation presents opportunities for Russia’s neighbours and they have moved to capitalise on them. Armenia’s trade with Russia grew 49% in the first half of 2022, with the corresponding figure standing at 40% for Kyrgyzstan, 32% for Georgia, 29% for Uzbekistan, 20% for Tajikistan, 17% for Azerbaijan and 5% for Kazakhstan. Data is unavailable for Turkmenistan.

Compliance challenges

The West has been more focused on sanctions compliance by Russia’s high-profile trade partners, especially China, Turkey and the UAE. However, “parallel imports” also present clear sanctions risks to countries in the post-Soviet space. The only Uzbekistani company on the US sanctions list ended up there because it did business with Russia. The US in June designated the little-known firm Promcomplektlogistic for shipping goods to a sanctioned Russian electronics maker.

Russia is interested in importing both sanctioned goods and those that are only under voluntary boycotts by certain producers. The latter is not a violation of Western sanctions regulations, and the assumption underlying the above-mentioned trade figures between some post-Soviet states and Russia is that it comprises such products. However, sanctioned goods have also probably been included in this trade flow.

Most post-Soviet countries have publicly professed compliance with Western sanctions. Kazakhstan set up a working group on the issue to conduct regular consultations with the US and the EU, as the country’s foreign minister, Mukhtar Tleuberdi, said on 14 September. He added that Kazakhstan wanted to avoid its companies coming under secondary sanctions, which are imposed for doing business with sanctioned entities or violating the sanctions framework. The EU and Russia are both major trade partners for Kazakhstan (respectively, 30% and 23%), a situation common for most post-Soviet countries.

Political risks from Russian pressure

The position of Kazakhstan and other post-Soviet countries as trade partners of both the EU and Russia poses political risks, as Russia may be tempted to pressure its neighbours into closer economic cooperation – which could include sanctions violation. Kazakhstan has seen several examples of Russian pressure in recent months. Although it has weathered these attempts, further Russian demands for such cooperation remain possible. And other regional countries that are more

dependent on Russia may find it more difficult to resist Russian pressure. Uzbekistan, to name one, made 7% of its GDP from remittances sent by migrant workers in Russia in 2021. Still, for now Russia appears aware that such pressure would be more counterproductive than non-public efforts to set up semi-official supply chains that may or may not pose a sanctions risk.

A sanctions minefield

The potential for sanctions circumvention presents an immediate risk for companies doing business in the South Caucasus or Central Asia. Local counterparties and even local offices of foreign companies are suddenly finding themselves obliged to comply with a complex sanctions environment in Russia, and they may be unwilling or unprepared to navigate it properly.

The most obvious risk is local business partners succumbing to the temptation to violate the sanctions and smuggle prohibited goods into Russia, perhaps underestimating the risk of being detected by Western regulators. The case of Promcomplektlogistic is illustrative here.

Another potential issue is a lack of understanding of the sanctions landscape. Sanctions compliance is a new concept for many companies in the South Caucasus and Central Asia, and companies may simply not be aware of the restrictions on the provision of certain goods or services to Russia – such as logistics services or dual-use items – which Russian entities may be seeking to procure under ostensibly innocent pretexts.

Finally, in some cases, “parallel imports” even of permitted goods may result in problems with Western providers of such goods, if these have joined the self-imposed boycott of Russia. Such providers may deny future services to “parallel importers”, leading to supply chain disruption.

These risks do not apply to all sectors equally – some, such as logistics, finance and goods manufacturers, are more vulnerable than others. The risk should also be seen as long-term: under most scenarios, the sanctions on Russia will remain in place for years, likely even after the acute phase of the conflict in Ukraine is concluded.

What to do?

Given this environment, companies in the South Caucasus and Central Asia should consider the following steps:

  • Due diligence on business partners in countries that trade with Russia needs to be clear on the ownership and control structure of the organisation. This is a basic requirement in any sanctions focused risk assessment and due diligence procedures.
  • However, this due diligence could extend to including a review of these business partners’ clients, thus extending the due diligence into knowing your customers’ customers. This limits the risk of product diversion in countries that trade with Russia.
  • These diligence processes can be complemented by the addition of sanctions-related clauses to any contracts with local partners, particularly with major and/or long-term partners, and additionally – where possible – the right to audit the business partner.
  • Sanctions guidance and training are also helpful in our experience. Local partners or employees may either not realise the importance of sanctions issue, or have no clear understanding how to identify and escalate risk considerations.

 

This article is based on a research note originally published in Seerist Core. Find out more about how Seerist’s adaptive artificial intelligence combined with localized geopolitical risk expertise can help you identify, monitor and mitigate risks.