Now is the time for the Continent to crack down on its own ports and companies that enable Russian aggression.

Samuel Ramani

24 October 2024

EU countries are discussing ways to tighten sanctions on Russia. Restrictions on liquefied natural gas purchases from Russia and dual-use goods transfers to Russia top the agenda. 

Little progress is expected in the near-term, as Hungarian Prime Minister Viktor Orban has used his EU presidency to thwart the implementation of new sanctions on Russia. When Orban is replaced by Poland’s hawkish Prime Minister Donald Tusk in January, most observers expect the impasse to be broken and the sanctions regime to intensify.

There is an urgent imperative for European countries to make the sanctions regime against Russia more airtight. The IMF just raised its forecast for Russian GDP growth in 2024 from 3.2 per cent to 3.6 per cent. Yet the outlook for the Russian economy in 2025 looks much bleaker. The IMF just slashed its GDP growth projections from 1.5 per cent to 1.3 per cent next year. Even though Russia’s interest rates are at 19 per cent and soaring, inflation remains stubbornly high at 8.6 per cent.

As key sectors of its civilian economy stagnate, it is more reliant than ever on its bloated military budget to sustain growth. Even in the defence sector, Russia has 400,000 fewer workers than it needs and severely lags many industrial economies in automation. A combination of labour shortages, rising prices and foreign capital flight could lead to the bursting of Russia’s defense-industrial boom in the coming year.

Tighter sanctions would make Russia’s economic outlook even more pessimistic and raise the costs of its aggression against Ukraine. Europe needs to present a unified front against Russia’s shadow fleet of oil tankers and front companies that do Russia’s bidding.

In December 2022, the G7, EU and Australia jointly imposed a $60 per barrel price cap on Russian oil. Russia responded by investing more than $10 billion into antiquated uninsured oil tankers and used this shadow fleet to sell vast quantities of oil at higher prices. A June 2024 Kyiv School of Economics (KSE) report revealed that Russia’s shadow fleet oil exports had doubled in a year to 4.1 million barrels per day.

This alarming figure inspired Britain’s belated “call to action” at July’s European Political Community summit. Last week, Britain barred 18 Russian shadow fleet ships from docking in its ports and increased the total number of prohibited vessels to 43. The EU has imposed similar measures against the shadow fleet, but Russia’s largest shipping company Sovcomflot continues to rename and reflag vessels to evade detection. Tougher action is urgently needed to deprive Russia’s war machine of vital revenues and prevent dilapidated Russian ships from spilling oil into the Baltic Sea and Strait of Gibraltar.

After the first wave of sanctions were imposed on Russia in 2014, the Kremlin created a vast network of shell companies in Europe to secure access to contra-banned goods. This informal economy has also serviced Russia’s war-time allies. On October 17, Ukrainian anti-corruption organisation NAKO revealed that North Korean KN-23/24 missiles possessed microelectronic components from the US, Britain, the Netherlands, and Switzerland.

Much like the shadow fleet, Britain and the EU’s response to this loophole has been delayed and overly mild. On October 11, Britain announced that it had carried out 37 investigations into sanctions-busting companies but refused to issue any fines against them. Hermitage Capital Management CEO and Kremlin critic Sir William Browder described Britain’s lax response as an “embarrassment.” The EU has taken concrete action against only a small fraction of the pre-war total of 31,000 European companies with Russian beneficial owners.

Britain and the EU’s passivity is surpassed only by Switzerland’s willingness to flout the rules. Switzerland has not aligned with the EU’s mandate that European company subsidiaries in third countries enforce sanctions against Russia. The Swiss authorities insist that case-by-case prosecutions of sanctions violators under existing law are sufficient.

Empirical data suggests otherwise. By April 2023, Switzerland exported $276,000 worth of microelectronic components to Russia. These components helped Russia replenish its precision missile and drone stocks. The opposition Social Democratic Party of Switzerland is right to call Berne’s subsidiary loophole “scandalous” and a “huge step backward.”

European leaders routinely chastise Global South countries for giving Russia economic lifelines. Now is the time for Europe to crack down on its own ports and companies that enable Russian aggression.