How Russian Companies are Bypassing Sanctions

The tale of Siemens turbines in Crimea demonstrates the weakness of sanctions and the ingenuity of business
03.08.2017
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From the very beginning of the introduction of sanctions in 2014, Russia in a roundabout way has received the necessary imported goods and finances, while foreign businesses are actively trying to stay in the Russian market in the face of political barriers. Eduard Belozerov writes why the new sanctions will not work.


On July 5, Reuters reported tSiemens gas turbines had been spotted in Crimea. The equipment was there despite the EU sanctions, which prohibit European companies from selling energy technologies to the peninsula. These turbines were produced at the Siemens Technologies Gas Turbine plant, a joint venture of Silovye Mashiny (35%) and Siemens AG (65%), located near St. Petersburg.

Silovye Mashiny is owned by Russian oligarch Alexei Mordashov, who almost completely owns this asset after Siemens sold a blocking stake (25% + 1 share) to Highstat Limited. He also owns the large steel and mining company PJSC Severstal.

According to representatives of the German concern, the Russian state engineering company Technopromexport, a subsidiary company of the state corporation Rostek, was responsible for purchasing the equipment. In 2015, the turbines were purchased allegedly for the needs of power plants in Taman, although even then some media wrote that the equipment was intended for Crimea.

Suspecting this, Siemens stopped deliveries to Technopromexport, who had already received the turbines, but lacked additional equipment necessary for operation. Later they decided to sell the turbines at auction. However, in 2017 four turbines were discovered in the seaport of Sevastopol after its modernization. A special alteration of the equipment so that it could work without additional supplies from the German side had been carried out by Interautomatica CJSC.

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Jan Bauer / AP

As a result, Siemens took steps to avoid punishment from the European Union for violation of the sanctions regime. On July 11, Siemens filed a lawsuit with the Moscow Arbitration Court to return equipment from Crimea. Also, the German company initiated investigations into what happened, withdrew from Interautomatica CJSC, where it had a 4.5% stake, offered Russia to buy out those same turbines and stopped supplying new power equipment to Russian companies.

A number of analysts suggest that many companies will meet Russia's demand for power equipment, for example, American General Electric, Italian Ansaldo or Japanese Misubishi Hitachi Power Systems. Nevertheless, the other day the Ministry of Energy announced its intention to oblige the supplier companies to transfer to them the program codes for controlling the turbines. This is a necessary element in the functioning of technology, it is a commercial secret. Most likely, this is not necessary to disclose the secrets of companies, but to exclude such situations, as with Seimens.

How to avoid sanctions

Foreign companies have come up with different methods for circumventing sanctions. One of them is the choice of intermediaries, usually those who do not fall under the sanctions regime. For example, for some sanctions supplies are delivered from Western companies through export to Brazil and Turkey, countries that did not participate in the agreements on the ban on trade and cooperation between the EU and the US with Russia. Some dual-use products are produced in factories in China and India.

Sometimes third-party Russian firms order from foreign partners exactly the same thing as those which were banned by the state-owned company. Such situations the manager of one of the French suppliers describes as follows: "They asked exactly the same products as our previous client, they knew the specification, the price and with whom it is necessary to talk about it. We conducted a quick check and found out that no shareholder from the register of this company is included in any blacklist. That's all we can do, although in general we can guess what's going on here."

Under sanctions, Crimea, despite a formal significant reduction in its foreign trade turnover by 90%, in practice quietly receives necessary goods. Thanks to Russian companies that provide services for the transport of goods to the peninsula, one can find almost any banned good there, from food and agricultural products to household appliances. For example, goods for Crimea are delivered by St. Petersburg and Novorossiysk carriers, and the port of Novorossiysk is gradually increasing the volume of cargo turnover, from 121.5 million tons in 2014 to 131.4 million in 2016.

Cooperation in such a key area as energy, does not come easily for Western companies. July 20, there was news of a $2 million fine imposed on the oil company ExxonMobil by the US Treasury Department. The reason was the continued cooperation of foreign oil companies with Igor Sechin’s Rosneft state corporation, which in 2014 signed an agreement on services for drilling, production and transportation of hydrocarbons by the Sakhalin-1 consortium within the framework of the Far Eastern LNG project. The subsidiary company of ExxonMobil, Exxon Neftegas Limited is a part of the Sakhalin consortium.

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Sakhalin-1, Photo: Business Wire

Despite the risks, they continue to work with Russia in the banking sector as well. US financial institutions JP Morgan and Goldman Sachs through subsidiaries actively work with Russian business.

There are also reverse situations, in April the Financial Times learned about Russian brokers trading in prohibited securities. It turned out that the financial organizations of Otkrytie and BrokerCreditService, having offices in the US, are working with the shares of Mostotrest, Mosoblbank and bonds of Uralvagonzavod. These companies (the first two are connected with Arkady Rotenberg) are on the black list of the US Treasury Department. Adam Smith, a former senior adviser to the US Treasury's Office of Foreign Assets Control, believes that Russian brokers can get on the sanctions list, but their representatives say they work exclusively under the laws of Russia and the United States. As FT quoted one Russian broker: "Sanctions no longer work, no one punishes those who do not obey them. Western banks ask whether we observe sanctions, put a tick in the questionnaire and forget about it.”

Investments

After the 2014 sanctions, the volume of direct investment in the country fell sharply, from $ 69 billion to $ 21 billion. However, businesses were too interested in the Russian market. In 2016, from Germany, the amount of cash deposits was about 1.78 billion euros. Among the investors were producers of agricultural machinery Claas, dairy company Deutsche Milchkontor and pharmacist Bionorica, contributions were made by joint ventures like Russian-German EkoNiva, as well. However, it is not clear whether the scandal with Siemens will affect business in other industries - with direct bans on cooperation from the German authorities or the reputational costs of companies.

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Volume of foreign investment: Bahamas, Bermuda Islands, France, UK, China, Germany. Source: iz.ru

The Bahamas and Bermuda Islands became the leaders in terms of direct investment. They invested about a quarter of the total amount of financial investments in 2016, which amounted to $ 8.2 billion. Representative of the audit company SK Group Dmitry Vodchits believes that these offshore jurisdictions are used primarily by American companies to bypass the prohibitions on working with Russian business.

New sanctions, which the US Congress recently introduced against Russia, hit mainly in the same energy industry where US companies have significant interests, Russian economist Andrei Movchan believes. Germany's position on these prohibitions is quite contradictory. On the one hand, like the American oil lobby, there are concerned parties who are sharply protesting against the infringement of their business.

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