Have the sanctions on Russia failed?

I very much enjoy economist Robin Brooks's tweets, especially his charts showing how sanctions imposed on Russia have affected regional trade patterns. While direct trade between Europe and Russia has collapsed thanks to Russia's invasion of Ukraine and subsequent sanctions, the chart below shows a suspicious-looking countervailing boom in European trade with Kyrgyzstan.

A big chunk of these European goods are presumably being on-shipped from Kyrgyzstan to Russia.

New all-time highs for Italian (lhs) and Austrian (rhs) exports to Kyrgyzstan in Nov '23. This goes on from every single EU country to every single country in Central Asia and the Caucasus. When you add all that up, the numbers are big. The EU looks the other way for 2 years now. pic.twitter.com/Na5SrV9bpz

— Robin Brooks (@robin_j_brooks) March 10, 2024

Now, you can look at this chart and arrive at two contradictory conclusions. The first is that the EU's sanctions are not working because they are being avoided via third-party nations like Kyrgyzstan. (This is Steve Hanke's take on Robin's charts.) Or you can see the charts as evidence that the sanctions are working, for the following reasons.

Sure, prohibited goods are filtering through to Russia – that was always going to be the case. But consider all the extra nuisances and frictions that now exist thanks to sanctions. For instance, instead of JCB tractors being shipped directly from factories in Europe to Russia, they have to be transferred to a third-party country, like Armenia, then perhaps re-routed to yet another country for the sake of obfuscation, say UAE, prior to those tractors finally entering Russia. (One of Robin's charts illustrates the rise of the EU-Armenia-UAE-Russia nexus).

These new roundabout trade routes introduce all sorts of additional costs including taxes, customs fees, shipping, insurance, and warehousing, not to mention extra palms to grease. There is also the extra risk of getting caught somewhere along this chain. A dealer involved in moving tractors to Russia via a third-party country, for instance, might be blacklisted by JCB (which has voluntarily chosen to exit Russia), losing their dealer status.

These combined costs get built into the final sticker price that Russian must pay for contraband American and European imports. Think of this extra wedge as a "sanctions tax." This sanctions tax leaves Russians with less in their pocket. And that means fewer resources for Putin to wage war than if the sanctions had never been levied.  

So when I see Robin's charts of various transshipment routes, they suggest to me that sanctions are effective courtesy of the sand-in-the-gears effect I just explained.

Now, this doesn't mean that I think the coalition's existing sanctions program is sufficient. We are in a sanctions war with Putin, and that necessitates constantly opening up new economic fronts in order to throw Putin off guard and make it harder for him fund his war. The transshipment points illustrated in Robin's charts are a sign to me that existing sanctions are working, but they also seem like a great target for future sanctions.

And in fact, the coalition has already taking two steps to pressure transshipment to Russia.

The U.S. Treasury recently imposed secondary sanctions on any foreign financial institution that facilitates transactions involving Russia's military/industrial complex. (I wrote about this here). What this means, for example, is that banks in transshipment points like Kyrgyzstan will have to be more careful when they deal with Russian entities. Any trade involving the military-industrial sector that passes through Kyrgyzstan will likely grind to a halt. Other non-military trade transiting through Kyrgyzstan, say JCB tractors, will probably continue to make it through, but thanks to heightened sanctions risk, banks will pass on this risk to Russians in the form of a higher sanctions tax.

The second step is the EU's new and very provocative "no-Russia clause." It requires EU exporters to contractually prohibit their trading partners from re-exporting certain restricted goods to Russia. If caught, fines must be paid or the contract voided. That adds more sand in the gears.

One hopes that the coalition of nations arrayed against Russia continues to increase its pressure on transshipment points. For instance, the EU could widen the range of goods subject to the no-Russia clause, the current list being somewhat limited. For now, though, my guess is that Robin's charts will show that the coalition's sanctions program is doing a better job in 2024 than it did in 2023, with the EU's no-Russia clause and the U.S.'s secondary sanctions being the proximate cause of that improvement.