Editor’s note: This is the first in a series of Kyiv Post articles on how Russia evades sanctions to wage its war against Ukraine.
When Russian President Vladimir Putin called the new T-90M Proryv “the best tank in the world” last year, he lauded the country’s military leadership and manufacturing sector for working together to produce the hardware needed to fulfill Russia’s imperialist objectives abroad. Few would have believed that the tank, now seen regularly on the battlefield in occupied Ukraine, is reportedly constructed with tools and parts sourced from across the world – including European countries that have issued expansive economic sanctions against Russia aimed at preventing such cooperation.
Roughly 20,000 sanctions have been levied against Russian companies and individuals by the US, EU, and allies since the country began its full-scale invasion of Ukraine in Feb. 2022.
And yet a small manufacturing company in central Italy, M.T. Marchetti (M.T.S.R.L.), is allegedly responsible for providing the machine parts used to construct the high-tech sights of T-90Ms that enable troops to visualize their surroundings from inside the vehicle, according to an investigation by The Insider. Without the sights, Russian soldiers would essentially be operating blind, dependent on drones controlled by a paired unit for eyes on the ground. The contributions from Italy are essential to the tank’s construction.
Dozens of UK Companies Under Investigation for Avoiding Russian Sanctions
Although Italian companies and individuals are legally restricted from doing business directly with Russian entities, existing sanctions leave a swathe of loopholes that make it simple for businesses to bypass the limitations and continue business as usual.
M.T. has been doing business in Russia for decades. To adhere to sanctions, the company appears to work with Russian clients through a subsidiary – MT-Tools, also referred to as Comand Tool. M.T. Marchetti advertised attending the annual Metallurgy Conference in Moscow in 2016 and 2019, appearing in the expo’s vendor list under that name. But later, company representatives continued attending the conference under the name of Comand Tool – as recently as this year. The subsidiary’s website is active and lists the contact information of a local agent to contact for more information.
World leaders have said time and again that the Union’s wide-reaching sanctions would result in a crippled Russian economy that would strip Putin of his power and end the country’s invasion of Ukraine. But companies like M.T. seem to demonstrate how easy it is to flout these regulations. The Italian company has continued its business relationships in Russia via loopholes despite posting a “No-Russia Clause” in March declaring its adherence to international sanctions, stating that the company “shall not in any event, re-sell, re-export in Russia or re-sell or re-export for the use in Russia, goods or technology” as listed in EU regulations.
Thousands of other European companies and entrepreneurs appear to be using the same type of backdoors into the Russian market through third-party countries or subsidiary companies, bypassing international sanctions in just a few bureaucratic steps. Although information about sanction busting by companies like M.T. can be found easily through open-source investigations, enforcement of these regulations and penalties for those who strategically dodge sanctions is lacking.
Ukrainian officials and allied leaders have pointed out these gaping holes and called for a more robust network of international sanctions and accountability for rule-breakers.
“We should treat modern-day electronics used in rockets the way that the EU treats sausages,” Ukrainian MP Maryan Zablotsky, a member of the parliamentary Finance Committee, told Kyiv Post.
“They are heavily regulated. All meat products have a requirement called traceability – they are literally obligated to trace every sausage down to the field where the grain to feed that pig was produced. Why aren’t we doing that with weapons?” asked Zablotsky.
Other European officials have made similar comments. “The sanctions and other measures to weaken the Russian economy are effective, but even more can be done. We must continue to increase pressure on Putin’s regime and support Ukraine,” wrote seven European finance ministers in an op-ed for The Guardian in July.
Several American politicians have taken aim at the ineffectiveness of the sanctions regime too. Republican presidential nominee and former President Donald Trump has called on Europe to carry more of the burden of NATO and economic limitations on several occasions. “You know, the United States should pay its fair share, not everybody else's fair share,” he told Politico earlier this year.
Russian economy growing despite sanctions
Russia’s economy has held strong since the country launched its full-scale invasion of Ukraine in 2022, despite years of international sanctions against thousands of individuals, companies, and industrial sectors. While sanctions from the US, EU, and other allies have forced Russia to restructure its financial industry and the management of its major exports, the restrictions have so far done little to dissuade the illegal occupation of Ukraine.
Russia’s GDP exceeded expectations by growing 3.6% in 2023, following a contraction of 1.2% the year before, according to the Carnegie Endowment. The ruble lost over 40% of its value immediately following the Kremlin’s first attacks on Kyiv in Feb. 2022 but was quickly stabilized by a double-digit interest rate hike and the introduction of capital controls to stem inflation.
Putin shifted Russia’s industrial production to a wartime economy soon after invading Ukraine, concentrating 60% of the country’s manufacturing capacity to war-related sectors by mid-2024, according to CEPR. Russia’s economy had already returned to pre-invasion levels of growth and export by the beginning of 2023.
The World Bank classified Russia as a high-income country in 2023 for the first time since 2015. Among the key factors that contributed to economic growth in 2023 are trade (+6.8%), the financial sector (+8.7%), and construction (+6.6%). Russian GDP began evening out to its pre-war, post-pandemic levels by the second quarter of 2023 and is expected to continue rising. In 2024, the IMF currently projects Russia’s GDP to continue growing at a rate of at least 2.6%.
Major differences between US and EU sanction frameworks
International economic sanctions have been piling up against Russia since the country invaded the Donbas region and illegally annexed Crimea in 2014, and they were intensified after the full-scale invasion of Ukraine began. The sanctions levied by the US and EU are similar in content but differ significantly in their legal frameworks and implementation – resulting in markedly different impacts.
“A good look to the long-serving United States’ sanctions framework will pay off for the European Union when creating the foundation for future sanctions regimes,” wrote Konstantin K. Oppolzer, a Swiss lawyer and former visiting scholar at Georgetown University, in a report last year. “The post-2022 sanctions against Russia are in many ways a turning point for the European Union’s sanction practice, uncovering considerable insufficiencies, but also sparking critical reflection and much-needed innovation.”
American politicians have been using international sanctions as a tool of diplomacy for longer than their European counterparts, allowing for a more efficient and practiced legal tool.
“The US sanctions framework is in many ways a well-oiled machine that has been running without greater changes for a long time,” Oppolzer wrote. “The EU sanctions framework, in contrast, has, seemingly unnoticed, since its comparatively recent inception, suffered from considerable insufficiencies.”
Russia’s invasion of Ukraine forced the EU to revisit existing sanctions policies in 2022 and identify areas for improvement. When allies froze the international assets of the Bank of Russia and eventually limited Russian companies’ access to the SWIFT banking system in 2022, for example, an incomplete enforcement mechanism allowed several players to continue using the network.
“This capability depends on a well-functioning and reliable framework governing the adoption, implementation, and legal remedies against sanctions. The United States can in many ways be regarded as a role model and as a reference point for this endeavor,” Oppolzer said.
Russia’s top exports still going strong
The Russian economy has been tied to gas, oil, and metals exports since the country began rebounding in the early 2000s after the upheaval caused by the fall of the Soviet Union. The bulk of the Russian economy is supported by taxes from the service sector, averaging over 55% of the GDP over the last decade. But revenue from the oil and gas industries routinely accounts for 30-50% of the total federal budget – making it the country’s largest single source of outside income, according to a report by the Oxford Institute of Energy Studies.
Oil exports have been responsible for over 25% of tax revenue in the Russian economy for years, while natural gas and steel exports have made up a smaller but growing percentage of the country’s income. Crude oil alone is responsible for about 16% of the country’s GDP. Iron ore and steel exports accounted for about $23 billion in revenue or roughly 5% of Russian GDP in 2023, a decrease of 20% in production value from 2021.
Russia was a top three global producer of 13 critical raw materials outside the energy sector, such as palladium, nickel, and titanium, and is also the world’s third largest source of diamonds, according to a 2022 EU report. European entities were Russia’s top client in 2021, responsible for 27% of all Russian exports of metal goods before the full-scale invasion and the roll-out of international sanctions, according to Rosstat. European companies are still buying up a huge proportion of Russia’s metal exports: the EU imported 3.36 million tons of raw steel materials from Russia in the first half of 2024, according to the Ukrainian think tank GMK Center.
European companies find backdoors into Russian trade
A key loophole in European sanctions legislation has specified that only finished products are restricted, allowing companies to continue importing semi-finished or unfinished products or parts. European countries like Germany and Italy are still top export partners with Russia, pumping billions of dollars into the Russian economy. International discourse about bolstering these sanctions has been stifled by domestic opposition to the potential fallout that could occur due to completely cutting Russia out of the international trade market.
Find more statistics at Statista ]
EU members like Hungary and Slovakia, which have been vocal opponents to several pro-Ukrainian initiatives proposed to the Union, have prevented the passing of further legislation that could shore up some of these loopholes. Hungary’s leader, President Viktor Orban, has supported the softest penalties possible for Russia’s invasion of Ukraine and claimed that the war cannot end without maintaining diplomatic relations.
“We will be maintaining our economic relations with Russia and we advise the entire Western world to follow suit, since without relations there will be neither ceasefire nor peace talks,” Orban said during his annual state of the nation address in 2023.
New leadership in Slovakia has echoed similar statements, recently proposing a new workaround for Budapest and Bratislava to continue trade with Russia despite existing EU sanctions. Prime Minister Robert Fico said he had discussed the issue with Ukrainian Prime Minister Denys Shmyhal in July and proposed “a technical solution” to continue Russian oil shipments to “several states including Slovakia,” according to Politico.
The 12th sanctions package passed by the EU late last year reflected these difficulties, weakening restrictions in some industries instead of strengthening them. The importation of Russian steel slabs by European countries, for example, was originally slated to cease completely by October 2024 per the 8th sanctions package. But the 12th package extended the period for EU companies to find alternative producers until 2028 with an importation cap of 8.5 million tons, according to GMK Center.
“The actual import volumes of Russian slabs during October 2022 – September 2023 were 32.5% less than the established quota,” GMK analyst Andriy Glushchenko wrote in a December report. “Despite this, the European Commission did not revise the quota for the second period.”
He explained that the quotas in the new sanctions actually exceeded recent import levels because of lobbying by European manufacturers: “European buyers lobbied for such authorized volumes of Russian slab supplies that will allow them to continue operating under the current business models for a long time.”
Glushchenko concluded: “This situation will have a negative impact on the competitive situation in the European market: rolling mills operating on Russian semi-finished products will remain in a more favorable position compared to integrated producers.”
Other economists have also pointed out the challenges to passing sanctions regulations caused by lobbying within certain powerful industries. “There are strong players on the market that are basically against these sanctions, and this fuels all the discussion – they like to protect their ability to buy cheap goods from Russia,” Yuliia Pavytska, a sanctions expert at the Kyiv School of Economics, told Kyiv Post.
The long timeline that EU importers of Russian goods are granted to find alternative sources has also given sanctioned exporters time enough to find new buyers, Pavytska said, undercutting the fundamental goal of the sanctions – to weaken the Russian economy and strangle the flow of goods into and out of the country.
“From the Ukrainian side, we have to take into account the dependencies and potential problematic cases, in terms of strengthening sanctions, and how to help EU countries move faster,” Pavytska said. “The longer the negotiations and adoption of new measures take, the more time Russia has to find new markets and reorient their trade networks.”
Because restructuring European sanctions against Russia requires the support of all 27 EU member states, responding to the concerns of all members is imperative to approving more robust legislation and bolstering support for Ukraine.
Sanction-busting by EU members weakens Ukraine as critiques by American allies gain volume
As Ukraine approaches its thousandth day of all-out war, more and more people on both sides of the Atlantic have begun questioning the effectiveness of economic sanctions for stopping the war. There is a palpable tension in Washington that US-European relations have gone askew. November’s elections will decide not only who will occupy the White House for the next four years, but also the composition of Congress. Meanwhile, American leadership appears to be debating its role in the war – to the detriment of Ukraine.
Some American critics, largely amongst MAGA Republicans, have increasingly perceived the US as pulling its weight in combating Russia, while Europe is dragging its feet. “We have an ocean in between some problems... we have a nice big, beautiful ocean,” Trump told Politico. “[NATO] is more important for [European countries], he added, calling it a “European problem.” His message has resonated with several politicians, even if there is significant evidence countering his claim.
The US has provided both less aid in total to Ukraine than Europe in the last two and a half years and less aid as a percentage of its GDP than even the majority of individual European countries, as can be seen in data compiled in the Ukraine Support Tracker by the German think tank Kiel Institute for the World Economy. However, he may have a point when it comes to sanctions.
A Washington-based Republican political consultant, who often works on Ukraine-related matters, told Kyiv Post that there was “certainly” concern from some MAGA circles as to why Americans paid so much for Ukraine’s security, yet many European countries allow their companies to continue doing business with Russia. “If Trump wins, you can be certain that the lack of sanctions, for instance, being implemented by European allies compared to America’s more in-depth sanctions, will be noticed,” underlined the consultant.
“NATO allies are not all pulling their weight evenly in helping Ukraine,” another Republican insider with knowledge of congressional negotiations on Ukraine, granted anonymity to discuss sensitive information, told Kyiv Post. “Per sanctions, the US is issuing far more sanctions than Europe. Do the Europeans not understand that Trump’s team notices this discrepancy? A Trump presidency could see a rollback in sanctions.”
“Europeans should urgently start reflecting on their choices,” cautioned the Republican advocate of Ukraine.
The double standard is obvious to many In Ukraine too, where there is a growing disappointment that the country is being bled of its next generation. Europeans are calculating their options for stopping Russia while protecting European corporations’ profit line, Maryana, a Ukrainian refugee and single mother who fled the country at the start of the invasion, told Kyiv Post. “It seems quite cynical to say ‘I support Ukraine,’ while also helping to finance Russia’s war against Ukraine. Europe needs to stop sitting on two stools.”
Many Ukrainian economists agree. “Now it’s very important to get this sense of urgency, to act while the Russian economy is overheated so that it's increasingly harder for them to manage and keep everything under control while their military spending is extremely high and they are fueling inflation,” Pavytska said.
But not all differences between US and EU sanctions necessarily hurt American companies. “There are definitely markets and spheres where US companies are benefiting by having a larger share [of some trade sectors] and absorbing Russia’s lost opportunities,” she said. US exports of natural gas, for example, have increased by at least 12% since allies began sanctioning energy imports from Russia, according to US government data.
How November’s outcomes will change the face of European-American relations is unclear, but growing tensions belie a troubling reality – the current status quo is untenable. Americans seem unwilling to continue bearing the brunt of the weight of international sanctions while Europeans continue to collaborate with Russia’s largest corporations aiding in the country’s aggression in Ukraine and other countries.
“A new, more equitable sanctions framework that spreads the economic burden to all allied partners is the only way forward,” the Republican strategist told Kyiv Post.
For many Ukrainians, it is key for internal partners to remember who is really to blame for the economic turmoil and contentious negotiations. “It’s important to move the focus from the end responsibility lies on Putin and Russia’s war on Ukraine rather than sanctions – this is the first driver of any negative externalities on the world market, including US companies,” Pavytska said.
Representatives for M.T. Marchetti and its possible subsidiaries did not immediately respond to a request for comment by Kyiv Post.
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