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German exports to Russia's neighbours fuel sanctions evasion fears

By Rene Wagner

BERLIN (Reuters) - Exports from Germany to countries bordering Russia rose sharply again in the first quarter, fuelling concerns that re-exportation of goods from neighbour states is helping Russians circumvent sanctions imposed over Moscow's war in Ukraine.

The value of German exports to Russia itself slumped by more than 47% in January-March compared with the same period a year earlier, reflecting tough restrictions on trade imposed by the European Union and other Western powers.

But exports from Germany to Kyrgyzstan rose some 949%, to 170 million euros ($187.14 million), a Reuters analysis based on data from the German statistics office shows.

Although they remain relatively modest in value, German exports to Georgia rose by 92%, while those to Kazakhstan rose 136%, to Armenia 172% and to Tajikistan 154%.

The surge in trade, which also rose sharply last year following Russia's Feb. 24, 2002 invasion of Ukraine, will reinforce concerns that sanctioned goods are still ending up in Russia after being sold on by traders in next-door states.

"How else could such growth rates be explained?" said Gabriel Felbermayr, a trade expert and president of the Austrian Institute for Economic Research (Wifo).

Group of Seven (G7) leaders will discuss tightening the screws on Russia at their summit in Japan this week, including efforts to stop sanctions evasion involving third countries.

An 11th package of EU sanctions, currently being negotiated, will also focus on people and countries circumventing existing trade restrictions.

"The circumvention of sanctions against Russia is unacceptable," German Finance Minister Christian Lindner said in Brussels on Tuesday.

But cracking down on re-exports is complicated by overlapping customs and trade agreements among countries that are not all signed up to Western sanctions regimes.

"Armenia, Belarus, Kazakhstan and Kyrgyzstan are in a customs union with Russia," said Wifo's Felbermayr.

"That means they have a common customs regime towards third countries and what goes from the EU to Kyrgyzstan can be resold to Russia without further controls and customs duties."

STEPPING UP PRESSURE

Exports of motor vehicles and motor vehicle parts to Kyrgyzstan grew particularly strongly in the first quarter, soaring more than 4,000% from a very small base to over 84 million euros. Metal products, chemical products and clothing exports also increased by more than 1,000% apiece.

That came after a six-fold rise in German exports to Kyrgyzstan last year following Russia's February 2022 invasion of Ukraine. Exports of goods "Made in Germany" to other countries near to Russia likewise grew strongly last year.

German exports to Turkey, seen as another route for goods to travel to Russia, also galloped ahead in the first quarter, rising almost 37% to just under 8 billion euros compared with an overall rise in German exports of 7.4%.

Turkey is in a customs union with the EU.

"Industrial goods can thus enter Turkey from the EU duty-free," Felbermayr said. "But because Turkey does not participate in EU sanctions, EU goods are further exported from there to Russia."

The same goes for imports from Turkey to Germany. These could contain significant amounts of Russian components without the EU being able to do much about it, Felbermayr said.

Under pressure from the G7, Turkey agreed earlier this year to stop the transit to Russia of Western goods prohibited under sanctions, which a senior U.S. Treasury Department official said this month was starting to show in Turkish trade data.

Washington has stepped up diplomatic pressure on countries and private companies globally to ensure enforcement of sanctions.

A senior EU official told Reuters that European companies must also ensure they know who the end-user of the goods they export will be or run the risk of potentially facilitating circumvention.

"If you suddenly see exports of goods that have previously been sold by your company to Russia exponentially being exported to a third country, I think you should be asking yourself if you are not contributing to the circumvention of sanctions," the official said.

($1 = 0.9084 euros)

(Reporting by Rene Wagner, Christian Kraemer and Gabriela Baczynska; Writing by Maria Martinez; Editing by Catherine Evans)