EU looks before it leaps on hitting countries that help Russia beat sanctions

Brussels is considering a new, unprecedented step in its sanctions approach against Russia. But first, it has to find a deal among the EU’s 27 countries.

Since the start Russia’s full-scale invasion of Ukraine over a year ago, Brussels has adopted 10 sanctions packages against Moscow — covering everything from energy to banking — in a bid to empty Vladimir Putin’s war chest. One unintended consequence is that trade has boomed with a handful of of countries in the Caucasus and Central Asia becoming intermediaries in commerce with Russia.

Now, Brussels wants to make sure its sanctions, especially for high-tech goods useful for the Russian army, are not being circumvented. EU countries are now negotiating an 11th sanctions package that could target other countries helping Moscow dodge its trade embargo.

Yet this move is aggravating underlying tensions in the bloc. While a number of countries, such as Poland and the Baltics, want Brussels to go further, a larger number of countries is afraid the EU is going too far, too fast. Germany, Europe’s biggest exporter, leads this second, more cautious, group.

“It’s an unprecedented step for Europe, so it’s normal that we are taking our time for this,” said one EU official. “We have to target circumvention. But we also have to ask ourselves: Can we really afford to make even more enemies in today’s world?”

The anti-circumvention ban would empower Brussels to hit third countries if they fail to comply with Western sanctions or can’t explain a sudden rise in trade in banned goods, according to the proposal seen by POLITICO.

EU countries would have veto power in this process at almost every step. In an updated version of the proposal, seen by POLITICO and discussed by EU envoys on Tuesday, the Commission introduced even more safeguards in the decision-making process to accommodate countries’ concerns.

But, so far, that has not been enough. Among the larger group of skeptics, Germany has been the most vocal in warning that naming and shaming countries would hurt diplomatic relations, for example with Beijing, and even drive other countries, for example in Central Asia, further in the arms of Russia or China.

Trade Commissioner Valdis Dombrovskis broached the issue on a visit to Central Asia this week: “We count on our Central Asian partners to not allow their territory and their businesses to be misused in any way, shape or form,” he said on Friday at an event in Kazakhstan.

Maria Shagina, a research fellow at the International Institute for Strategic Studies, said “the risks associated with the new instrument are that it would cause more diplomatic damage than it would prevent sanctions evasion.” It’s deterrent potential would be weakened because it would only be used as a last resort, argued Shagina.

Instead, Germany has proposed its own plan to stop sanctioned EU high-tech goods from ending up in Russia through middleman countries. Rather than hitting the countries that are allowing sanctioned goods to be re-exported to Russia, Berlin is proposing to focus on companies, according to a discussion document dated May 5 and seen by POLITICO.

European Commission officials caution, however, that the German proposal would be difficult to enforce. The buying company could resell to several shell firms before exporting goods to Russia, or pop up under a different company name, leading to a game of cat and mouse.

Not the only issue

The anti-circumvention ban is the most sensitive bit of the new proposal. But there are other thorny issues on the table that have clogged up the discussions.

Brussels wants to target a so-called shadow fleet of tankers shipping Russian crude around the world, a sensitive issue for shipping nations such as Greece and Malta. These southern countries have more questions on the maritime measures, several EU diplomats said. “As long as the blockade exists on the maritime issue, member states are not forced to really show their hands on the discussion about third countries,” said one of the diplomats.

A third thorny issue is Ukraine’s list of private companies it calls “war sponsors” and includes a number of European companies.

Both Hungary and Greece want some of their companies struck off this list before they will agree to the package, diplomats said. Hungary’s OTP Bank is specifically sensitive for Budapest, Hungarian Foreign Minister Péter Szijjártó said earlier this month.

Ukraine has to clarify what the list exactly entails, said a EU senior official.

“It is not entirely clear who is in that Ukrainian list,” said the official. “Whether the whole bank or the Russian branch, which according to my information is about 1% of the activities in banking and financial capital activities of the of the bank. So that would be a huge, huge difference,” he said, adding that the Josep Borrell, the EU top diplomat, is already in touch with Kyiv to seek clarification.

Another EU diplomat familiar with the discussion said that “Greece complains that Kyiv included Greek companies, moreover without any advance warning, for activities that are perfectly legal under the sanctions adopted by the EU. If Kyiv has any indications of breach of sanctions, they should approach the Member States and share the facts, so that they be duly investigated. This groundless witch-hunt against EU Member States is totally counterproductive.”

The diplomat added that meanwhile, Ukraine remains “conspicuously silent when it comes to third countries actively engaged in and profiting from real sanctions circumvention.”

However, there is pushback against this link. “It is totally unacceptable to link Ukraine support to the blacklist; there are many countries on the blacklist,” said one EU diplomat, adding that “I can only lament the fact that member states taking files hostage which are quite unrelated to the files going forward.”

EU foreign affairs ministers will discuss this list at their meeting on Monday. After that, EU envoys will resume discussions on the next sanctions package on Wednesday.

Although most EU diplomats played down hopes of quick progress, they remain optimistic of reaching a deal eventually. “Each package has proven to be more difficult, but we always got there in the end,” said one of the diplomats.

Jakob Hanke Vela, Leonie Kijewski, Suzanne Lynch and Camille Gijs contributed reporting.