Unresolved questions: Regional trade patterns change in wake of EU’s Russia sanctions

The European Union has imposed economic sanctions from the outset of Russia's invasion to Ukraine. Since then, EU exports to Central Asia and the Caucasus surged. To what extent is this driven by increased demand and market reallocation of goods, and to what extent does this represent Russia (and Western companies) circumventing sanctions?

Two years have elapsed since Russia invaded Ukraine, and in that time the EU has afflicted a barrage of sanctions on Moscow – thirteen packages in total. These economic measures, aiming to cripple Russia's war effort, include tight controls on trade, particularly for heavy machinery, vehicles, and electrical equipment. Such measures, in particular controls on exports to Russia, have since altered global trade patterns.

Russia’s external trade nosedived after the outbreak of the conflict, even with some of its traditionally closest trading partners. The aftermath of EU sanctions saw a sharp drop in exports to Russia from EU member states, falling to EUR 52.6bn in the subsequent twelve months, down from EUR 106.8bn recorded in the twelve-months prior^[1]. These goods did not disappear overnight. They likely have not been stored as inventory until trade with Russia resumes; they simply found new markets.

New patterns emerge in EU exports to Russia’s neighbours

Inextricably linked to the decline in EU-Russia trade was an unusual surge in European exports to countries in Central Asia and the Caucasus, drastically altering trade dynamics in the region. Armenia, Georgia, Kazakhstan, and Kyrgyzstan emerged as just a handful of key beneficiaries of EU goods seeking alternative destinations.

IMF data shows EU exports to Armenia increased by 178% between July – December 2021 and July - December 2022, while they grew by 45% to Azerbaijan, 41% to Georgia, 116% to Kazakhstan, and 537% to Kyrgyzstan; and this was not a short-term phenomenon either. Comparing the same base period to July – December 2023, EU exports to Armenia increased by 128%, and were up by 41% in Azerbaijan, 49% in Georgia, 98% in Kazakhstan, and 856% in Kyrgyzstan. Perhaps unsurprisingly, these countries registered steep increases in exports to Russia shortly after.

Figures 1-3: Monthly exports from select EU member countries to select South Caucasus countries (USD mN, 2019-2023, Germany right-hand side axis)

Notably, countries experiencing the sharpest decline in exports to Russia—such as Germany, Poland, and the Czech Republic—saw the steepest uptick in exports to the aforementioned countries.

German exports to Kyrgyzstan grew by 807%, to Armenia by 192%, and to Kazakhstan by 105%; all three of which are part of the Eurasian Economic Union, a customs-free trade bloc with Russia. A similar trend is apparent in Poland, where exports increased to Kyrgyzstan by 807%, to Armenia by 549%, and to Kazakhstan by 107%. The same figures in question for Czech Republic came to 502%, 255%, and 291%^[2].

Figures 4-5: Monthly exports from select EU member countries to select Central Asia countries (USD mN, 2019-2023, Germany right-hand side axis) Figure 6: Monthly export to Russia from China, Turkey, and the EU (USD mN, 2019-2023, Turkey right-hand side axis)

Central Asian economies witnessed robust growth in 2023, estimated at 5.7%^[3], but the sheer scale of the export increases by EU member states suggests these were not simply driven by domestic demand. There is reason to suspect many of these goods might be finding their way through to Russia.

While direct EU sales to Russia plummeted, Russian imports from trading partners like China and Turkey took off. Although exports from these countries initially dipped following the onset of conflict, trade flows swiftly recovered thereafter. Exports from China and Turkey to Russia were up 52% and 62%, respectively – and by December 2023, China’s exports to Russia hit a record monthly high of USD 10.7bn.

The changing trade dynamics in the region can be traced to the fall in EU exports to Russia. If Russia is not exclusively offsetting this swift decline in imports from the EU with higher trade flows from China and Turkey, it is likely also doing so through indirect EU-Russia trade via Central Asian countries.

Studies lend weight to sanctions circumvention theory

With aggregate trade data alone, this hypothesis remains anecdotal; without tracking products it is difficult to verify this dynamic. However, recent studies by the European Bank of Reconstruction and Development (EBRD)^[4] and the IESEG School of Management^[5] corroborate this notion, moving it past the realm of mere speculation.

The EBRD study indicates that Western (EU and UK) companies are exploiting Central Asian countries as a conduit for goods destined for Russia, particularly those subject to EU sanctions, at a “limited scale”. Their research shows a much sharper decline in sanctioned goods going directly to Russia compared to non-sanctioned goods, while the export of sanctioned goods to Armenia, Kazakhstan, and Kyrgyzstan increased by an extra 30% relative to other goods. Similarly, the IESEG research paper provides statistical evidence of EU sanctions being circumvented for sanctioned products.

The relative changes were consistent in Sino-Russian trade flows also. It was found that Chinese exports of sanctioned goods to Russia, Armenia, Georgia, Kazakhstan, and Kyrgyzstan increased by 8-15% more than the increase in trade of other goods.

If Russia is able to circumvent economic sanctions to import restricted goods in the manner implied by these studies’ findings, this raises substantial doubts about the efficacy of sanctions in their current form. A more stringent monitoring process must be put in place to ensure companies comply with the economic sanctions and preserve the integrity of international laws.

1. https://data.imf.org/?sk=388dfa60-1d26-4ade-b505-a05a558d9a42 ↑
2. July – December 2021 and July - December 2022. ↑
3. https://www.ebrd.com/news/2023/ebrd-forecasts-strong-economic-performance-in-central-asia.html#::text=According%20to%20the%20Bank%2C%20GDP,5.9%20per%20cent%20in%202024. ↑
4. The Eurasian roundabout: Trade flows into Russia through the Caucasus and Central Asia ↑
5. https://www.europeanbusinessreview.eu/page.asp?pid=7120 ↑