How do Russian companies circumvent sanctions?
One of the ways the international community can influence Russia and persuade it to stop military actions in Ukraine is through economic embargoes and sanctions imposed on citizens and other entities, including businesses, originating from that country. Sanctions have a particularly adverse impact on the financial condition of Russian companies. Not only can they not sell their products or services abroad, but foreign entrepreneurs also do not want to cooperate with them, mainly because they are afraid of possible sanctions. Breaking the embargo can result in severe financial penalties of up to 20 million PLN and imprisonment for 3 to 15 years. Economic intelligence provides information on how Russian companies circumvent these sanctions.
Business intelligence
In the current situation of the war in Ukraine, Polish companies, when establishing cooperation with a new contractor, are concerned about whether it has any ties to Russia. After all, international sanctions have been imposed on companies from that country and on trade with it. Under these conditions, establishing cooperation with a Russian contractor can result in blocking deliveries at the port, returning goods at the border, and, above all, being subject to high financial penalties and criminal liability. Private detectives in Warsaw and other major cities receive many more orders today to verify the ownership structure of business partners as part of economic intelligence than they did a year ago, before the outbreak of the war in Ukraine. Russian companies often use various strategies to circumvent sanctions. Here are a few of them:
a) Change of name and registration: Russian companies change their name, flag, and entries in registers of entrepreneurs, ships, to avoid sanctions and continue their operations.
b) Cooperation with other companies: Russian companies cooperate with companies from countries that are not subject to sanctions, allowing them to conduct transactions through these companies.
c) Creative accounting: Russian entrepreneurs use creative accounting to hide the true course of their transactions.
d) Use of offshore markets: Russian companies use offshore markets, tax havens, where sanctions do not reach.
e) Expanded ownership structures: Russian companies expand their ownership structures so that it is difficult to determine who the real beneficiary is, i.e., who actually exercises control over the company.
f) Online trading: Russian companies primarily bypass sanctions by buying and selling on the Internet, both using popular digital platforms and directly, hiding the true delivery location.
g) Dummy companies: Russian entrepreneurs import and export goods through dummy companies registered in countries not subject to sanctions.
A collection of media reports
As reported by the OKO.press portal in an article entitled “Russian companies bypass EU sanctions! Unfortunately, Poles are helping them”, the trade embargo with Russia is easy to circumvent, particularly for Russian businesses operating in the outer region of the EU border. They offer intermediary services. On Russian and Belarusian websites (international sanctions have also been imposed on Belarus), they encourage people to shop on Allegro in Poland. After the transaction is completed, the Russian or Belarusian buyer provides the Polish seller with the address of a warehouse located on the border territory of Poland. The warehouse owner collaborates with the aforementioned Russian intermediaries. Payment from the Russian buyer goes to the intermediary’s account, and the intermediary transfers the funds directly to the seller’s account in Polish zloty. The intermediary then forwards the shipment from the warehouse to the final address in Russia or Belarus. The Polish seller is not aware of this at all. In this way, intermediaries deliver goods to the East not only from Poland but also from all over Europe, the United States, and Asia.
In addition, Russian intermediaries operate their own sales portals, impersonating Polish e-commerce platforms. As reported by OKO.press, such portals even offer banned goods known as “dual-use”, which are equipment that can be used by the military, such as drones, night-vision devices, and thermal imaging cameras.
Meanwhile, the Polish Institute of International Affairs reported last October that Russians are concealing the trade in sanctioned goods, particularly oil, through companies in non-EU states. Due to shortages of certain products, Russian authorities allow their importation (including vehicles, metals, and technology) without the trademark owner’s consent. This is known as parallel importing, which Russia has legalized, allowing foreign products to be imported into the country not only by entities that have obtained the manufacturer’s permission.
To enable the crossing of goods across the Russian border, customs declarations are falsified by labeling the goods with a false commodity code. PISM also reports that Russians settle their accounts through bartering, e.g., with Iran, and Russian firms already have considerable experience in circumventing Western sanctions. Following the annexation of Crimea, for example, in 2015, German Siemens delivered gas turbines for the construction of power plants in Crimea, and French Auchan sold its products there through a company registered in Russia. To avoid inspections, Russian oil is reloaded at sea instead of in port, and tankers have an unclear ownership structure, use fake registration numbers and flags. Crews manipulate location systems. Russians also refine oil in other countries, such as India, and sell it further, including to the USA. In Poland alone, 45 criminal proceedings related to sanctions violations were initiated in September 2022.
The legal parallel import is also discussed by DziennikPrawny.pl in an article titled “How does Russian trade circumvent sanctions? Illegal sales of Western products are thriving.” The portal reports that Russian companies buy goods in the West through dummy companies. Meanwhile, Bankier.pl in an article titled “How do Russians circumvent sanctions? Where do they get their iPhones and Mercedes?” writes that in Russia, the bazaar trade “with large plastic bags” is experiencing a renaissance, reminiscent of the 90s. Luxury goods are smuggled in the luggage of people who can move freely, for example, thanks to their second citizenship. Goods from the West are also often imported to order by elegant boutiques. They are imported, for example, from Dubai or Turkey, where EU sanctions are not enforced.
Better to thoroughly check the contractor
Given the above, before making a transaction or starting a new business relationship with a new company, it is better to conduct an economic investigation and thoroughly check your counterparty to ensure they are not connected to Belarus or Russia. Violating the sanctions imposed on trade with these countries can result in a financial penalty of up to PLN 20 million and imprisonment for three to fifteen years.