On 20–21 October, EU leaders will discuss their relationship with Russia and whether to retain, adapt or drop the sanctions regime introduced in 2014 to express discontent with Russia’s actions and to constrain its behaviour. While the debate in Western capitals has focused on the personal and sectoral sanctions to influence Moscow’s policies, little attention has been paid to sanctions erosion.
Businesses and local authorities in Donbas and Crimea have been exploiting loopholes in the sanctions regime, but these transgressions have not so far met with any response from Western governments. Their silence is sustaining the finances of the unrecognized authorities in occupied territory in Donbas and Russian-annexed Crimea.
A recent investigation by Reuters showed that at least two European retailers, Auchan and Metro Cash&Carry, are active on the Crimean market. In addition 260 merchant ships flying 32 different flags are believed to have docked at Crimean ports in violation of sanctions since their introduction.
While US and EU companies are clearly prevented from doing business in Crimea, there is a grey area around the operation of their subsidiaries in Russia and in Crimea that can be classified as Russian companies. Sanctions also do not prohibit the registration of proxy companies, operating in the interests of foreign companies. The unrecognized Crimean authorities have acknowledged the presence of foreign companies and are attempting to safeguard their activities.
Sanctions related to Crimea have also so far not addressed the issue of expropriation of Ukrainian assets and their transfer to Russian entities. For instance, the EU sanctions list still does not include those top officials who have enabled this and engineered their further privatization, such as the head of the Property Executive Regulatory, the minister of property and land relations, members of the Crimean parliament and newly elected MPs from Crimea in the Russian parliament.
The US, at least, recently included a further eight Crimean government ministers on its list of sanctioned persons, banning them from travel to the US. But the new owners of expropriated business assets are not yet facing sanctions. For example, the Tatarstan Federation of Trade Unions that took control of the ‘Foros’ health and recreation resort, previously owned by the Privat Group, is not on the sanctions list.
In the case of the separatist entities in the Donbas, the EU and US sanctions lists do not include business entities, but instead the individuals connected with political and military bodies. This partially reflects the attempt to normalize economic and social life in the region that is part of the Minsk agreements.
Unlike in Crimea, a lack of institutional capacity on the part of the unrecognized authorities in Donbas has so far prevented mass nationalization. The prevalence of opaque export schemes is critical and the OSCE Special Monitoring Mission to Ukraine reports regularly of truckloads of coal being moved across the border to Russia. Once it has crossed into Russia, the coal is registered by small, recently established companies and certified as Russian in origin. It is then exported to Europe through Ukrainian sea ports under Russian control. Smuggling schemes such as these sustain the financing of separatists in the occupied territories.
The West’s response
A less leaky sanctions regime requires a comprehensive monitoring system with the power to close loopholes. To enhance these capacities, the EU should intensify its dialogue with the Ukrainian Ministry of Justice and NGOs who witness sanctions violations on the ground. The EU decision of October 2012 on tightening sanctions against Iran to close loopholes provides an example of how a sanctions regime requires updating to achieve effectiveness.
An additional problem is the lack of a dedicated EU body tasked with sanctions monitoring and enforcement. Responsibility is delegated directly to member state governments. Although they have the capacity to ensure compliance from the private sector and to impose fines for violations, they have so far failed to do so. Fining companies that flout sanctions would set a precedent and serve as a warning to others tempted to stray.
This silence undermines EU and US efforts to uphold the overarching goal – to restore Ukraine’s territorial integrity. Preservation of the existing sanctions regime without closing loopholes and increasing monitoring and compliance is leading to its incremental weakening by stealth.
Kateryna Bogoluslavska has ten years’ experience working in political analysis and consultancy. She is an expert on state-business relations in the former Soviet space. Her research at Chatham House examines why vested interests in Ukraine and Moldova continue to flourish.