Russian Business Scheme to Circumvent Tariffs and Fund War

Executive Summary:

• Moscow introduced a new accounting scheme enabling European buyers to pay for gas in rubles, circumventing U.S. sanctions and using intermediaries and currency exchanges to bypass restrictions. 
• Russia has expanded its shadow fleet and increased its oil tanker capacity by 70 percent, helping it increase oil supplies to countries willing to buy it at prices higher than the price threshold set in the West. 

• Russian companies are seizing assets, resources, and businesses, including mines and factories, in occupied Ukrainian regions, with profits fueling the war and raising war crime allegations. 

Russian businesses have been severely affected by Western sanctions due to Russia’s war in Ukraine and many of them are finding covert ways to circumvent these sanctions. At the end of November 2024, Moscow offered European buyers of Russian gas a new accounting scheme, which would permit the Europeans to circumvent U.S. sanctions. The sanctions that this scheme would circumvent were made against Gazprombank and went into effect on December 20, 2024. These sanctions made it impossible for European companies to pay for gas supplies to Gazprom due to the risk of falling under secondary sanctions (U.S. Treasury Department, November 21, 2024; Meduza, November 26, 2024). To avoid limitations, on December 5, 2024, Russian President Vladimir Putin signed amendments to the executive order on special procedure to allow foreign buyers to meet their commitments to Russian natural gas suppliers, which was originally issued on March 31, 2022 (Kremlin.ru, March 31, 2022). The amendment stipulated that “until April 1, 2025, a foreign buyer’s commitment to pay for natural gas supplies is considered duly fulfilled if the payment is made in rubles” (Publication.pravo.gov.ru, December 5, 2024). Pro-Kremlin financial expert Igor Yushkov explained, “A third party can now be involved,” and from now on, “Europeans can find any other structure that is ready to take their currency, convert it to rubles, and transfer these rubles to Gazprombank”(Vzlyad, December 9, 2024) Russian experts also advise European companies to transfer the currency to a third country, “and find a company in Russia that benefits from currency exchange,” making a kind of “currency barter” (Vzlyad, December 9, 2024). 

Proposals such as this new accounting scheme are hardly the only way Russian businesses circumvent sanctions. Russia continues to expand its shadow fleet of oil tankers to avoid the price cap set in December 2022 (Svoboda, December 1, 2022; Sever.Realii, January 14). At that time, the Group of 7 (G7) countries, the European Union, and Australia set a $60 per barrel limit to reduce Russia’s export revenues without sharply limiting supplies. This also meant that companies were not allowed to transport or insure Russian oil sold at a higher price (European Commission, December 3, 2022; Australian Department of Foreign Affairs and Trade, December 7, 2022). This has resulted in a new so-called “shadow fleet” of tankers to conceal the origins of cargo and the vessel’s ownership (UATV.ua, December 15, 2024; Ukranews.com, October 17, 2024). Moldovan company Zolos, which is linked to the family of former pro-Russian Odesa City Council Deputy Viktor Baranskiy, aids Russia in circumventing sanctions in this respect. Through Zolos, Russian, Ukrainian, and Moldovan sailors are hired to work on the ships in this “shadow fleet.” These ships, however, face numerous functional problems. Broken steering gear, rusted pipes, and a lack of spare parts are just some of the problems admitted to by sailors working on these ships. They claim that working on such vessels is mortally dangerous. Russian propagandists have not commented on how the shadow fleet is in disrepair because the owners of such vessels avoid inspections and neglect safety (Verstka.org, December 23, 2024).

In 2024, Russia increased its oil tanker capacity by 70 percent, helping it increase oil exports to countries willing to buy it at prices higher than the price threshold set in the West (Verstka, December 23, 2024). Sailors note that the shadow fleet often delivers Russian oil to India. Pro-Kremlin media boast that “Russia supplies nearly 2 million barrels per day to India via sea transport and supplies nearly 40 percent of all oil imports to the country” (Vzglyad, December 17, 2024).  In December last year, reports circulated that a “historic deal” to supply, under a ten-year contract, about 500,000 barrels per day of crude oil and fuel oil had been signed by Russia’s Rosneft and India’s Reliance Industries (The Moscow Times, December 12, 2024). Rosneft claimed to be prepared to sell oil to India at a significant discount (Vzglyad, December 17, 2024). On January 26, Indian Ambassador to Russia Vinay Kumar, commenting on new U.S. sanctions on Russian oil supplied by the shadow fleet, stated, “No matter how the situation develops … India will continue to give priority to energy security” (Kommersant, January 26). He clarified that “Indian private companies purchasing Russian oil will make independent decisions” on how much oil would be imported (Kommersant, January 26).

There is evidence that there are Eastern European companies participating in illegal schemes to avert the implications for themselves of sanctions on Russia, including Belarussian and Polish companies. The manufacturer of BelAZ quarry dump trucks, a Belarusian company, sells equipment to European companies via the Polish company Polmark Kielce. The trucks’ logos and engines are changed to legalize the sales, passing them off as Polish rather than Belarusian (Belsat.eu, December 22, 2024). Russia’s efforts to circumvent sanctions have not only resulted in Moscow using funds from oil sales to finance the war against Ukraine but they have also led to many Russian companies profiting directly from the occupation of Ukrainian territories. Journalists have reported on how structures associated with Chechen leader Ramzan Kadyrov and the Chechen security services’ engage in trading grain in the occupied territories and make money from the captured Ukrainian PJSC “Mariupol Ilyich Iron and Steel Works” (Istories.media, May 16, 2024). The latest journalistic investigation published at the end of last year revealed that Russian enterprises from the entire country seized businesses, property, and resources in the occupied regions (Istories.media, December 20, 2024). Eighty percent of the total number of so-called “new owners” are from the south of Russia: from the Rostov and Volgograd oblasts, as well as the Krasnodar krai. Companies are most often registered in cities in the Donetsk and Luhansk regions. Among the cities captured since the full-scale invasion, businesses are registered mainly in Mariupol and Berdyansk. 

Russians are opening companies in the construction sector, scrap metal trade, and transferring mines and factories to themselves with the support of pro-Russian Ukrainian politicians, who are currently wanted in Ukraine. In 2023, 13 companies registered in the occupied territories following the full-scale invasion had revenues of more than a billion rubles. The leaders are the companies of the Southern Mining and Metallurgical Company, now managed by the Moscow firm “Soyuzmetallvervis.” Lawyers warn that “the appropriation of property not justified by military necessity is a war crime,” but this does not seem to discourage Russian businessmen (Istories.media, December 20, 2024). As Russian businesses continue to exploit loopholes and engage in illicit schemes to circumvent sanctions, foreign companies should remain vigilant to avoid becoming complicit in financing the war in Ukraine.