A glass half-full take on Caucasus sanctions evasion

Ed Conway of Sky News recently published a very good investigation on sanctions evasion being carried out through the Caucasus. He visits the Lars border crossing between Georgia and Russia to document how smugglers are openly moving British and German luxury cars into Russia, in contravention of sanctions on Russian luxury car imports.

In a subsequent interview, Conway describes this as the the "most depressing" bit of journalism he has ever worked on. He agrees with his host that the west's sanctions are "performative," in that they are simply there to make Western voters feel good, but in reality achieve very little. He concludes: "The toughest sanctions regime in history, is anything but..."

For anyone who supports Ukraine's cause, this is all difficult to watch. However, I think that Conway has arrived at a glass half-empty interpretation of the details of his own reporting. What follows is my glass-half-full take on Conway's visit to the Caucasus. What I'm hoping to convey – using the details from his video – is that we (i.e. the West) are doing ok. Yep, we could be doing better (and hopefully will), but let's take heart at what we've achieved to date.

Conway tracks two new Range Rovers being smuggled from Tbilisi, Georgia's capital, northwards to the Lars border crossing with Russia. Prior to Conway making contact with them, the Range Rovers have already been on a circuitous trek. Manufactured in Solihull, UK in 2024, we learn that the vehicles were originally shipped by Jaguar Land Rover to a dealer in a country that does not share a border with Russia, so not Georgia, but perhaps Turkey or the Emirates. Thus the first leg of their journey would have involved a long trip in a container ship or RORO cargo ship from England to Dubai or Istanbul.

In the second leg, the smugglers who acquired the car in Turkey or UAE paid for it to be shipped to Georgia, either by boat or overland.

In the third leg, which is the only leg that Conway observes, two single trucks can be seen transporting each Range Rover through Georgia to the Lars border crossing along a skinny winding road. The Range Rovers are deposited in a parking lot next to a "forlorn" cafe on the Georgia side of the border (the parking lot appears to have no security), and after a few days a new driver is paid to take the car to the Russia side and leave it there. 

The parking lot where sanctioned luxury cars are stored at the Georgia-Russia border

Now the fourth leg begins. Another driver is contracted to bring the vehicle to its final destination in Russia. This last leg is no small trip, with the biggest Russian markets, Moscow and Saint Petersburg, at a distance of 1,800 km and 2,500 km respectively from the border.  

These successive legs add up to an arduous trip. The shipping bill is likely quite large. To boot, along each leg of this journey additional paper work must be completed, insurance purchased, border officials bribed, storage fees paid, transit license plates acquired, and taxes levied. It is Western sanctions that have imposed this haphazard shipping burden and jungle of administration on Russia's trade in Range Rovers.

But compared to what? Understanding the burden we've imposed on Russia requires that we compare the current state of affairs to the one that was taken away; namely, the highly-developed patterns of trade that existed before sanctions were deployed in 2022. As economists like to say, it's the opportunity cost, or the value of the next-best alternative, that represents the true burden of the sanctions on Russia.

What Russia has lost is the full expertise and capital of Western logistics being brought to bear on the problem of bringing Range Rovers as cheaply and rapidly as possible from Jaguar Land Rover manufacturing plants to Russian buyers. This involved Range Rovers being loaded en masse into highly-efficient RORO cargo ships in the UK and sent – not along a circuitous route passing through the Suez Canal or around the Cape of Good Hope – but by the shortest passage possible, the Baltic Sea.

In the pre-sanctions era, vehicles destined for Russian buyers were unloaded at the Port of Saint Petersburg, Russia's second-largest city, or next door at the massive Port of Ust-Luga. So the goods passed through customs just once, rather than multiple times. These two Baltic ports are purpose-built for handling large amounts of vehicles as efficiently as possible. From there the Range Rovers were transferred to their final Russian destination – not piece-meal, as appears to be the case with the Lars crossing – but in batches via dedicated rail infrastructure and multi-level car haulers. 

Illicit Range Rovers being transported one-by-one via flat bed truck to the Georgia-Russia border

Thanks to sanctions, Russia's first-choice trade route – optimized over many years of trial and error – no longer exists. It's been replaced by an improvised Rube Goldberg trade route involving two much longer sea journeys followed by a crappy single-lane road wending its way through the mountains of Georgia to a border crossing that was never designed to handle large volumes of trade. Once across the border, the contraband cars must be on-shipped using rail or road infrastructure that pales in comparison to the significant economies of scale that characterize the Saint Petersburg/Moscow hub. This is plainly an awful fix.

There's another new cost that needs to be factored in, too: the risk of being caught. Given that it is likely that the dealer in the Emirates or Turkey is part of the sanctions evasion conspiracy, they run the risk of having their dealership status being revoked should Jaguar Land Rover catch them. The dealer will therefore only sell to Russians or other Russian-linked third-parties if the price offered is a high one, enough to compensate them for the risk of losing their franchise.

This extra risk premium, combined with all the additional transportation and intermediation costs listed above, gets embedded into the final all-in price that folks in Moscow will have to pay for a new Range Rover. How high is this price? Certainly much higher than before sanctions were applied. Stephanie Baker, author of Punishing Putin, found in her reporting that western cars in Moscow showrooms were being sold for twice as much as in the U.S. The Times describes luxury Bentleys selling in Moscow for about £400,000 plus £50,000 in VAT—the same model costs just £250,000 in the UK.

Think of this extra price wedge as a sanctions tax on rich Russian car buyers. So yes, cars are squeaking through the West's sanctions blockade, as Conway's reporting reveals, but let's not forget that this comes at a big cost.

A 2,000 km drive from Tbilisi to Moscow

The sanctions tax includes another component. A car is not just a one-time purchase. It represents a commitment to make long chain of repairs and tune-ups over its lifetime. Since the new Range Rovers in Conway's video are illicit, they won't qualify for any dealership support. The warranty is probably void, too. Telematic upgrades provided by Jaguar Land Rover servers in the UK have likely been turned off. Furthermore, since Jaguar Land Rover no longer sends parts to the Russian market, all replacement parts will have to be smuggled over the border, the cost of ongoing car servicing ballooning.

So in the end, voters in the West can take at least some pride from what western sanctions have achieved. By sanctioning luxury cars, we've forced Russian elites to divert more of their finite wealth to paying for circuitous, awkward, and risky pathways into Russia. This means these elites have less left over for other things.

Now, that doesn't mean western voters can relax, and Conway's reporting is good fodder for galvanizing voters to ask their representatives for further action. While sanctions have made the pathway for Range Rovers and other goods into Russia a long and winding one, we need to keep making it even longer and more awkward.

For instance, Conway's video teaches us that there is just one way road connecting Russia to Georgia. What a fantastic chokepoint for western sanctions to target! By working more closely with Georgian authorities, the U.S. and its allies may be able to induce them to add a number of frictions to the Lars border crossing, thus forcing car smugglers to divert contraband vehicles to even more roundabout trade routes, the end result being Russian elites paying an ever higher price.