Latvian law enforcement and economists on the alert for sanctions evaders

The latest trade data shows the continuation of a trend that has been evident ever since Russia started its war on Ukraine and the West responded with swingeing trade sanctions – while trade with aggressor countries Russia and Belarus has quickly reduced, trade with countries bordering Russia in central Asia has markedly increased.

While part of that may be explained by companies finding new markets for their goods, the size and rapidity of the changes raises serious suspicions that, whether knowingly or unknowingly, companies are continuing to send and receive goods to Russia via intermediary countries.

That is the subject tackled by Latvian Radio's Atvērtie Faili investigative show in a second part of its analysis of Latvian companies' trade relations with the aggressor states. Reporter Linda Zalāne visited the Latvian central bank to speak about the trend with Matīss Mirošņikovs. Earlier this year, Mirošņikovs co-authored a central bank report that flagged up the dramatically changing trade flows.

Since the beginning of the full-scale war in Ukraine, the exports of Latvian companies to Kazakhstan, Kyrgyzstan and Armenia have grown the most.

Matīss Mirošņikovs: "Currently, I can show what the export of goods looks like in terms of price from neighboring countries. Accordingly, it is possible that there has been a quite notable increase to Kazakhstan, Armenia, Kyrgyzstan.

"Also, the data of the Central Statistical Office lead me to conclude that last year, compared to the year before, the export of Latvian companies to Kazakhstan increased two and a half times. It increased by three and a half to Kyrgyzstan, and almost three times to Armenia.

"Of course, it is clear that part of this increase in exports can be explained by sanctions [avoidance] attempts. This is also visible in my analysis, at least it looks like it in the calculations.

Linda Zalāne: What are the goods that go to Russia in this way?

Matīss Mirošņikovs: "As far as I have looked, everything is there – from used cars to various high technologies, such as computer chips, antennas, various electronic products, machinery. That would be the heavier end, but it has also increased in luxury product groups. The export of clothes has also increased."

The economist does not claim that absolutely all companies that have redirected Russian exports to Kazakhstan, Kyrgyzstan and Armenia are trying to get around sanctions.

Matīss Mirošņikovs: "Of course, there are also companies that have moved their operations there. This is completely normal, because these countries are similar and there is a greater chance that some specific goods that are suitable for the Russian market would be bought in neighboring countries, and not somewhere on the other side of the world. Unfortunately, part of it comes with sanction avoidance as one of the explanations."

Not only Latvian companies, but also companies from other European Union countries seek these sanctions detour routes.

Matīss Mirošņikovs: "What suggests this... is a very large discrepancy between the European Union's exports to Kazakhstan and Kazakhstan's imports from the European Union. Accordingly, we say that we export, Kazakhstan says that it does not import. Then the question is, where do those goods go? Knowing also that Kazakhstan is in a customs union with Russia, one conclusion that can be drawn is that goods remain in Russia. The difference can be roughly observed there in what, according to my calculations, are the groups of goods subject to sanctions."


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Chart source: Latvian central bank

Next on Zalāne's visit list is the State Revenue Service and a meeting with Arturs Kovaļenko, Head of the Risk Management Department. He says that one of the most important issues on the agenda for the customs of not only Latvia, but also other European Union countries is the inspection of export transactions that might be destined for Russia, including to the neighboring countries of Kazakhstan, Kyrgyzstan and Armenia.

Arturs Kovaļenko: "New solutions were sought so that we could make sure that the goods really reach those countries. We work together both with our colleagues in the region and with the European Commission. And at the moment we have established control elements with which we can make sure that the sanctions are not circumvented."

Arturs Kovaļenko reveals what schemes are most often used by companies to circumvent sanctions.

Arturs Kovaļenko: "The goods are exported to Kazakhstan [for example], but they do not physically reach Kazakhstan and Kyrgyzstan. The next scheme is that the goods still reach Kazakhstan and Kyrgyzstan, and are sold on there for further delivery to Russia. Of course, we should not rule out the third option, that several merchants, looking for new markets, have indeed diverted some part of their cargo to those countries... Currently, approximately 80% of all controls performed by customs are directly related to sanctions."

Another of the investigative institutions that monitors compliance with sanctions is the State Security Service (VDD). It draws particular attention to the export of goods to Russia and Belarus that could be used for military purposes and to increase Russia's military and technological capabilities. The State Security Service said in a written comment to Latvian Radio:

"Since February of last year, the State Security Service has started 14 criminal proceedings based on suspicion of violating the sanctions set by the European Union, and three of them are related to the export of goods. In these criminal proceedings, the service conducts investigations on the basis of suspicion of unauthorized export of goods to Russia or Belarus, using Kyrgyzstan, Kazakhstan or China as an intermediary country to circumvent sanctions."

Since the investigation in these criminal proceedings is ongoing, the institution did not provide further details and did not name specific companies that are being investigated.

The State Security Service in a written comment: "At the same time, we can confirm that in the assessment of VDD, the cooperation of Latvian companies with Kazakhstan, Kyrgyzstan and Armenia is associated with an increased risk of evasion of sanctions. In addition, we inform you that high risks of evasion of sanctions can also be seen in the cooperation of Latvian companies with Turkey, the United Arab Emirates, Georgia, Uzbekistan and Azerbaijan."

In total, the European Union has imposed 11 rounds of sanctions against Russia and Belarus since Russia started its full-scale war in Ukraine, with Ukraine urging even more comprehesive measures.

The role of the Financial Intelligence Service (FID), is to monitor sanctions evasion not only in the financial sector, but also in export and import transactions.

Paulis Iļjenkovs, head of the Strategic Analysis Department of the Financial Intelligence Service, also helped Latvian Radio with an interview.

Paulis Iļjenkovs:"Of course, this relevance increased significantly, because the risks of circumventing sanctions are high in Latvia because we have had sufficiently serious trade ties with both Russia and Belarus. Some of this trade is currently subject to sanctions. The risks are also higher because we have an external border and so on."

Paulis Iljenkovs says that before the Russian invasion of Ukraine, the service received eleven reports a year about suspicious transactions related to sanctions. But after the start of the war, the situation has changed dramatically and the number of reports has increased several times over.

Paulis Iljenkovs: "Last year, we received 281 such reports on suspicious transactions. And this year, as of today, I asked my colleagues to look, there are already 309 reports."

"It is not yet clearly known that this is a violation. That is, the bank sees a transaction that has been made through the bank, or that has been attempted to be made through the bank, and suspects that the transaction is actually in violation of the sanctions. And then we evaluate whether those suspicions are justified or not."

If the Financial Intelligence Service concludes that the suspicions are justified, then the case is transferred to the State Security Service or the Tax and Customs Police Department of the State Revenue Service for further action.

The full Atvērtie Faili investigative show is below (in Latvian). 

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