President Donald Trump addressed his Russian counterpart Vladimir Putin via social media last week, calling on him to settle now and stop the war in Ukraine or face increased sanctions. However, as the experience of his predecessor shows, this may be easier said than done. Can Trump deliver more effective sanctions than Joe Biden, and if so, how should they be designed to avoid the fate of measures put in place before him?
It is common knowledge that in most instances, Ukraine-related sanctions have not gone deep enough. A recent Brookings blog post noted that global oil prices have barely risen since the latest wave of sanctions, suggesting that there is scope for further tightening of sanctions on the shadow fleet vessels before oil prices go up. In many other critical areas, where trade with Russia still flourishes and there is no trade-off between sanctions’ pressure and prices, sanctions should have gone deeper.
It is also clear that sanctions have not gone wide enough. Washington has taken a bottom-up approach, which has not been all that effective. In addition, the Biden administration chose to look the other way when it did not feel politically expedient to impose sanctions. As a result, Russia gained access to more resources and was able to kill more Ukrainian soldiers than it otherwise could have.
Azerbaijan, the main sanctions buster in the Caucasus
Azerbaijan, a country with which Biden Administration maintained cordial relations, was the main conduit for sanction-defying trade with Russia in the all-important Caucasus region south of Russia.
Its relationship with Russia is the most obvious and damaging part of the story. Baku entered a strategic partnership with Moscow, marked by an ‘Allied Relations’ Declaration in February 2022, just two days before Russia invaded Ukraine.
This alliance has expanded to include intelligence-sharing and hydrocarbon trade, allowing Azerbaijan to make a mockery of Western sanctions by shipping Russian oil and gas to Europe. Azerbaijan has also been one of the top four destinations for Russian oligarchs during the war in Ukraine.
Much of it is done via a country with which Russia just signed a new strategic partnership agreement – Iran. On January 7, 2024, Iran and Azerbaijan finalised an accord pertaining to the construction of the Rasht-Astara railway, aimed at eliminating a longstanding gap within the International North–South Transport Corridor, known as the INTSC.
The INTSC – a 7,200-kilometer corridor encompassing road, rail, and maritime routes – connects Russia’s St Petersburg with the port of Mumbai, India, via Azerbaijan and Iran. It attracted the financial support of the Putin regime and its completion is poised to enhance trade among Russia, Iran and Azerbaijan, providing Russia with a major way to circumvent sanctions.
Enter Armenia
Armenia is another country in the Caucasus that is doing Russia’s dirty work and helping advance its war efforts in Ukraine. Given that Armenia does not share a border with Russia, it has been allocated a role of a conduit for trade in less bulkier goods, such as, gold and electronics.
As reported recently by The Insider and the network of Armenia’s Investigative Journalists, Hetq, Armenian companies have been helping Russia bypass the Western embargo on gold trade. Backed by prominent politicians and business figures, these Armenian companies have facilitated the import of billions of dollars’ worth of gold into Armenia since 2022, subsequently reexported to the UAE. At the same time, cash and securities are reportedly flowing in the opposite direction – from the UAE to Armenia and then to Russia – in violation of sanctions.
It was broadly accepted in Washington that the Biden administration did not want to hurt Armenia, whose Prime Minister, Nikol Pashinyan, ran rings around Biden and former Secretary of State Antony Blinken pretending to be pro-Western. In the meantime, Armenia’s re-export of goods from Europe and China to Russia have gone through the roof after the start of the war in Ukraine.
Private efforts to assist the Biden administration to close some loops in Armenia were ignored. Sensitive intelligence about a sizable Russian-Armenian operation (potentially involving counterfeit dollars) provided by the National Democratic Alliance, Armenia’s largest pro-Western opposition party, to the US Embassy in Yerevan, was brushed aside.
It took OFAC – the US Treasury Department’s agency in charge of sanctions – over a year after sanctioning a large Russian electronics’ company Radioavtomatika to add its Armenia-based supplier, TAKO, to the list of entities accused of helping Russia evade U.S. sanctions in April 2023, the first such determination in reference to an entity in Armenia.
By then, there was a burgeoning market of newly established LLCs and LLPs in Armenia that were renting prime commercial real estate in downtown Yerevan and trading between Europe and Russia. Much of this was happening in broad daylight and could not have possibly escaped the watchful eye of the Pashinyan regime. When approached by a RFE/RL journalist, an executive of Medisar, an Armenian company sanctioned by the US Department of Commerce in 2023 for supporting Russia’s military and defence industry, said the ‘Armenian authorities were aware of its operation’.
Armenia also reportedly helped Russia to de-dollarise their bilateral trade. It took the US Treasury Department to threaten additional secondary sanctions for the Union of Banks of Armenia to stop servicing the Russian Mir payment system in Armenia as of March 30, 2024.
To do sanctions correctly, use political and trade pressure
The US has gotten this wrong all along. By focusing on bigger fish in large countries, it had virtually ignored the smaller fish in smaller countries in Russia’s neighborhood that have been successfully busting sanctions for years now.
The Europeans did not do much better than their US counterparts. Ironically, neither Azerbaijan nor Armenia is literally on EU’s sanctions map.
Busting anti-sanction traffic cannot be done just from Washington or Brussels. The US and EU do not have the resources to go after everyone who wants to make a quick buck trading in darkness. This needs to be done in collaboration with local partners, pro-Western political parties and NGOs, who have a better sense of what is happening in their own backyards.
Credible pressure – perhaps with the use of both sticks and carrots – needs to be applied to governments that have allowed loopholes to flourish. The low-income and emerging-market governments found guilty in help evade sanctions should be forced to pay political and financial costs, by facing sanctions of their own and cuts in the US assistance. This will also provide a sensible rationale for the Trump administration for levying tariffs on trade from those countries (in cases where trade with the US is significant), thus hitting the violators where it hurts. The alternative is more death and continued war.
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