diff --git a/_collections/_hkers/2024-04-22-back-in-stock.md b/_collections/_hkers/2024-04-22-back-in-stock.md new file mode 100644 index 00000000..c1449ee9 --- /dev/null +++ b/_collections/_hkers/2024-04-22-back-in-stock.md @@ -0,0 +1,369 @@ +--- +layout: post +title : Back In Stock? +author: Maria Snegovaya, et al. +date : 2024-04-22 12:00:00 +0800 +image : https://i.imgur.com/D8Y0KpS.jpeg +#image_caption: "" +description: "The State of Russia’s Defense Industry after Two Years of the War" +excerpt_separator: +--- + +_Two years into the war, Russia’s prospects have improved. By tapping into its Cold War–era stockpiles, Russia has ramped up domestic arms production. It has also solidified ties with China, Iran, and North Korea, importing dual-use goods and weapons from these countries._ + + + +### Introduction + +As Russia’s full-scale invasion of Ukraine drags into its third year, Russia’s defense industry has found ways to get what it needs to ramp up arms production. The Kremlin still relies on foreign components to fuel its war effort. But it has been able to maneuver around the Western sanctions regime by turning to countries willing to supply its defense sector or by using complex cut-outs to acquire Western components indirectly. With these parts and components secured, Russia has been able to leverage its sizable weapons stockpiles built up over the Cold War period. These stockpiles of aging and often outdated equipment have enabled the Russian defense industry to overhaul and modernize older platforms quickly and at lower cost. Russia has also claimed to have increased production of some newer weapons systems entirely from scratch. In both cases, whether refurbishing older or producing brand new systems, the Kremlin has continued to rely on foreign components imported via a complicated network of intermediaries. This has proved critical to sustaining the Russian military in Ukraine. + +This report is a follow-up to the April 2023 report Out of Stock? Assessing the Impact of Sanctions on Russia’s Defense Industry. Last year’s report concluded that, during the first year of the war, sanctions created shortages of higher-end foreign components, while Moscow’s efforts at state-backed import substitution were largely limited. The sanctions affected Russia’s ability to manufacture, sustain, and deliver advanced weapons and technology to the battlefield in Ukraine. The report said the war would stress Russia’s military industrial base, already stretched thin by sanctions and high battlefield losses during the first 12 months of the invasion. + +What has changed in a year? As last year’s report warned, the Kremlin still possessed a significant degree of adaptability to Western sanctions and could take advantage of its prewar stockpiles of older equipment as well as countries’ willingness to supply Moscow with restricted dual-use items and technology. That has indeed been the case. Using global supply chain data, the 2024 report analyzes the flow of restricted goods to Russia and the latter’s procurement priorities. This analysis shows that Russia remains dependent on foreign components and technology but has shifted its procurement patterns, with more military goods flowing into Russia now being sourced from civilian or dual-use suppliers. The report also demonstrates the depth and breadth of China’s support for Russia’s war effort, which, while not providing weapons directly, has enabled the ramp up of Russia’s defense industrial base to the detriment of Ukraine. + +As a result, two years into the war, Russia’s prospects have improved. Russia has successfully adapted its military and defense industry to minimize the impacts of the Western sanctions regime. The Kremlin has ramped up domestic production of weapons and equipment and thus has kept its army relatively well supplied. It has solidified defense ties with China and Iran and has even imported large amounts of military equipment from North Korea. Russia still relies on its older refurbished weapons stockpiles, and goods that come from its new suppliers are of lower quality than their Western alternatives, as last year’s report predicted. However, and similarly matching predictions from last year’s report, the current war of attrition in many cases does not require sophisticated high-end weapons systems and instead may be fought with large amounts of relatively cheap munitions (as demonstrated in the sections below). Therefore, Moscow’s efforts to reinvigorate its defense industry, coupled with the current pace of the war and the six-month-long Western stagnation of Ukraine aid, have ultimately translated into direct Russian battlefield successes. + +Still, Russia’s defense industry faces a number of unresolved issues, which have been exacerbated by the protracted war and sanctions and can negatively impact performance of the Russian Armed Forces in Ukraine. Among these issues are an underdeveloped military high-tech industry, corruption in the area of military procurement, an overheating economy, and labor shortages due to war-induced migration and attrition. + +The following report details Russia’s evolving defense industrial capabilities and limitations during the second year of the war (February 2023–February 2024) and how these changes have affected and will continue to affect battlefield outcomes in Ukraine. Thematically, the report is divided into four main parts, which combined provide a holistic picture of Russia’s defense industry: + +1. __The state of Russian weapons systems in 2023:__ The report starts with a brief overview of Russia’s domestic arms production efforts throughout 2023, followed by a detailed examination of key Russian weapons systems (such as tanks, artillery, drones, missiles, and electronic warfare systems) and their changing roles on the battlefield. + +2. __Russia’s evolving import diversification efforts:__ The report then looks into the defense industrial capabilities Russia is now prioritizing to adjust to the Western sanctions regime. In doing so, CSIS tracked Russia’s general procurement dynamics and the efforts of Russian companies affiliated with the Kremlin’s war machine. This part of the report thus identifies the imported components and weapons categories that Russia’s defense industry has particularly relied on in the second year of the war and includes a case study on China to illuminate Russia’s evolving procurement patterns. + +3. __Existing Russian military industrial limitations:__ This part of the report dives into analysis of the Kremlin’s remaining weaknesses, which have been aggravated by a long war of attrition and which can have both short- and long-term effects on its military. + +4. __Russia’s strategy in Ukraine in 2024:__ The final part of the report assesses how Russia’s performance throughout 2023 and its evolving defense capabilities might be translated into its offensive posture in Ukraine in 2024. This part of the report is followed by recommendations to Western policymakers on how to counter the Kremlin’s war effort by capitalizing on the Russian military’s existing vulnerabilities. + + +### Part I The State of Russian Weapons Systems in 2023 + +#### Russian Figures on Increased Defense Production + +In 2023, a relatively favorable economic situation enabled the Kremlin to keep boosting domestic arms production. Russia’s ability to continue shipping most of its crude oil while bypassing the G7’s oil price cap, coupled with a favorable oil price dynamic, allowed it to sustain increased defense spending, which in turn became the main driver of its economy. Additionally, technocrats steering the Russian economy have proved capable of managing the impact of sanctions, softening the war’s overall immediate and short-term effects on the majority of the population. + +In this context, Russia accelerated weapons production capacity of its defense industrial sector by employing a number of state-run or affiliated military and civilian factories. However, before discussing general Russian defense production trends and numbers throughout 2023, it is worth highlighting that, due to the lack of independent open-source data, many Western observers have relied on the defense production figures reported by the Russian Ministry of Defense (MOD) and other Kremlin-linked sources. This report also cites those figures to showcase the Russian MOD’s ongoing activities and plans going forward (even if the numbers provided are likely inflated). + +One important takeaway coming from Rostec, a state-owned defense conglomerate, is that the company and its subsidiaries were ordered to accelerate the pace of production for all kinds of weapons systems by multiple times ahead of the 2023 Ukrainian counteroffensive and are expected to expand even further in 2024. According to Rostec, in 2023 it increased overall production of tanks 7 times, light armored vehicles 4.5 times, and artillery and multiple launch rocket systems 2.5 times. The chief executive officer (CEO) of Rostec also said the company ramped up manufacturing of certain types of ammunition by as much as sixtyfold. + +In addition to boosting arms production, Russia reportedly increased output for components — such as computers, electronics, and optical systems — that play a vital role in construction of different weapons systems from tanks to missiles. According to the Russian Federal State Statistics Service (Rosstat), production of these products between January and November 2023 increased by almost 35 percent compared to the same period in 2022. Official statistics have also claimed that production of remote-control equipment, including for guiding uncrewed aerial vehicles (UAVs), has increased around 80 percent annually. Similarly, Denis Manturov, deputy prime minister of Russia, boasted about a 58 percent growth rate in domestic production of machine tools. + +In late December 2023, the Russian MOD announced that throughout the past year the military received more than 1,500 tanks, 2,200 armored combat vehicles, 1,400 missiles and artillery weapons, and 22,000 UAVs. While impressive, the authors believe these numbers to be inflated. Additionally, it is difficult to estimate what share of these weapons was produced locally from scratch, what share was refurbished, and what share was imported from third countries willing to do business with Russia. Still, these MOD figures paint a picture of a reinvigorated domestic defense industrial sector capable of replenishing its military with new and modernized weapons. + +The Russian government projections for 2024 include similar messaging. Russia’s national defense spending in 2024 will total 10.8 trillion rubles ($109 billion), which means that for the first time in the country’s post-Soviet history, 6 percent of its gross domestic product (GDP) will be spent on the military (compared to 3.9 percent in 2023). Defense spending will exceed social spending, accounting for nearly a third of Russia’s total budget expenditures for the year. This is reflected in the Russian MOD’s ambitious claims that defense industry organizations are expected to supply Russian forces with “more than 36,000 basic types of military equipment, 16.5 million weapons, and more than one million units of portable weapons, personal armor protection, and communications equipment,” allegedly exceeding the same figures for 2022 and 2023 by several factors. + +While, as mentioned above, the official data and statements coming from the Russian MOD are most likely exaggerated, and therefore should be taken with a grain of salt, they demonstrate the Kremlin has placed renewed emphasis on strengthening the domestic defense industrial sector. To do so, the government claims to have increased the number of defense workers, with some state-run plants and factories transitioning to a 24-hour shift schedule; simplified the procedure for concluding contracts with the Russian MOD for development and production of military products; and shortened the required timeline for selecting components and testing new weapons, among other things. The MOD also claims to have implemented a system of interdepartmental coordination to monitor and organize the work of defense industrial enterprises and respond to issues arising during production and repair of military equipment. It is likely that Russia will proceed with these efforts in 2024. + +#### Key Weapons Systems Used in Ukraine + +Two years after the invasion, the overall picture for the Russian military posture has become more complex. Russia has shown resilience and adaptability to continue pressuring Ukraine on the battlefield: it has adapted to Ukrainian tactics; absorbed manpower losses while continuing to field more and more soldiers; and — as the previous section demonstrates — reinvigorated its domestic arms production, building new and refurbishing older weapons and technologies. These measures have yielded enough effect to stalemate Ukrainian efforts to advance and break through the Russian positions. + +More precisely, this high-intensity war of attrition has prioritized certain lower-cost and lower-quality weapons like less advanced tanks, armored vehicles, artillery, small drones, and kamikaze UAVs that Russia continues to field in large numbers and that are proving effective. By contrast, more high-tech Russian weapons, such as advanced aircraft and helicopters, have proved vulnerable to Ukrainian countermeasures, leading the Russian military to withhold deploying these systems on the battlefield. Similarly, advanced Russian missiles have fallen prey to Ukrainian interceptors and are in short supply due to a high rate of usage. + +This section provides an overview of the key weapons categories used by Russian forces in Ukraine, analyzing the evolving role they have been playing on the battlefield and highlighting systems that were especially critical to Russia’s war effort throughout 2023. + +#### Tanks + +Throughout 2023, the Russian military continued to rely on its tank force, reportedly receiving more than 1,500 tanks (approximately 125 per month) and losing somewhere between 600 and 874 (approximately 50–73 per month), based on different estimates. While these open-source data suggest Russian tank production has increased, allowing the Russian army to maintain a large tank force despite continued losses of these vehicles, the analytical community also believes the 1,500 tanks delivered last year likely included a number of refurbished tanks from the battlefield as opposed to new-build hulls and turrets. For instance, one NATO official recently claimed that about 86 percent of the main battle tanks (MBTs) Russia produced in 2023 were refurbished. While Moscow has been estimated to maintain 5,000 tanks in storage, the official noted that “probably a large percentage of those can’t be refurbished and are only good for cannibalizing parts.” Another open-source analysis examining satellite imagery has argued that Russia has removed between 25 to 40 percent of its tank strategic reserves from open-air storage facilities since 2022. + +Visual evidence coming from the battlefield confirms this reporting, showing Russia deploying its 60-year-old T-62 tanks and 70-year-old T-55 tanks against the Ukrainian forces. As the overall quantity of old Soviet tanks in Russian storage likely remains in the several thousands, the Russian MOD can field such vehicles over the course of many months in 2024, assuming they can be refurbished and are not awaiting dismantlement. Public analysis of the Ukrainian battlefield shows that some of these Russian tanks received upgrades such as new radios, modern optics, and additional layers of reactive armor, with the most common upgrade to both newer and older Russian tanks being the anti-drone metal cages and slat armor, often referred to as “cope cages.” According to CSIS’s Mick Ryan, “These cages have helped either crush the fuses of Ukrainian antitank weapons before they hit a vehicle’s main armor or forced antitank weapons to detonate before they can penetrate the vehicle.” The cages have provided an additional layer of physical protection to Russian tanks, thus giving the Russian soldiers more confidence to operate in places with a high risk of Ukrainian drone attacks. + +However, visual evidence also suggests that the “cope cages” may not be universally applied. Some of the other older tanks, for instance, have no discernible upgrades and have been mainly used not for frontline combined arms mechanized assaults but as artillery and self-propelled howitzers. This shift, while already underway due to the general effectiveness of Ukrainian anti-tank guided missiles (ATGMs), was accelerated by the rapid emergence of first-person view (FPV) drones in significant numbers, which have the capacity to attack any vehicle on the battlefield, and by tanks’ vulnerability to these cheap and expendable systems. + +The situation may change if Russia manages to accelerate production and deployment of more advanced tanks on the battlefield. Uralvagonzavod, Russia’s largest tank manufacturer under the umbrella of Rostec, is expected to be the main driver of this effort by ramping up production of T-90 and T-80 tanks as well as the Terminator 2 tank support combat vehicles and TOS-1/TOS-2 multiple rocket launchers. In November 2023 the CEO of Uralvagonzavod stated that the company, per the Russian military’s request, was even considering producing the T-80BVM MBTs entirely from scratch. Later reporting on this topic indicated that Russia managed to produce new variants of not only T-80BVM MBTs but also T-72B3M MBTs. + +Overall, judging from the above-referenced data, Russian forces will likely continue utilizing older tanks throughout 2024, given that they are available in large numbers and thus can be relatively quickly and easily replenished. However, as these vehicles generally come with less protection and are vulnerable to drones and ATGMs, Russia will probably continue to use them mainly as mobile artillery. While the Russian MOD is trying to boost production of more advanced variants such as the T-90, T-80, and T-72 MBTs, it is not yet known if this effort will yield the intended results. + +#### Artillery Systems + +Russian military artillery has been used to devastating effect, with Russian systems firing thousands of shells daily across the entire front. Western military analysis points to the improving situation with artillery systems production and refurbishment, as well as delivery and use at the front. In 2022, the Russian industry quadrupled 152-millimeter (mm) artillery round production, manufacturing one million rounds. This was achieved by reallocating production capacity from other shell calibers. To increase the quantity of ammunition produced, Rostec took control of 15 enterprises at the start of 2023. Today, the Russian military fields an estimated 4,700 barrel artillery systems, including the 2S19 howitzer and other systems that fire 122 mm and 152 mm rounds. The Russian military may also have as many as 1,100 multiple launch rocket systems. Rostec also indicated in December 2023 that it is testing the new Koalitsiya-SV self-propelled artillery. Its mass production has already started and there will likely be a growing number of these systems deployed in Ukraine. + +Overall, according to the Royal United Services Institute (RUSI), Russian artillery use in Ukraine indicates that it is a capable component of the Russian military. It has a significant ability to find and strike targets over a wide area and likely retains the ability to mass fire against targets of opportunity. Russian artillery forces are continuing to build on their reconnaissance-fire contour, with aerial drones providing intelligence, surveillance, and reconnaissance (ISR) and target acquisition information to enable artillery systems to strike identified coordinates quickly and often with relative precision. At the same time, there are growing indications among Russian military commentators about the ability of Russian artillery systems to evade and escape Ukrainian counterbattery fires. In addition to self-propelled howitzers, the Russian military has close to 7,500 towed artillery pieces overall, down from approximately 12,000 stored towed pieces two years ago, indicating that Russian forces may be cannibalizing older barrels to replace those worn out by continued fighting in Ukraine. These older weapons can potentially keep the frontline batteries operating for a long time, with the Russian defense industry once again relying on its massive Cold War–era stockpiles to maintain ongoing combat. + +#### Uncrewed Aerial Vehicles + +One of the biggest developments in this war, especially in 2023, was the rapid emergence and scaling up of the so-called Russian loitering munitions kill chain — a compilation of UAVs with the ability to find and track targets, convey targeting data, and then assign a fire mission to the selected strike asset. To complete the kill chain, Russia has relied on short-range tactical FPV drones and commercial quadcopters, mid-range Lancet and Kub drones, long-range Geran-2 drones and their derivatives, such as the Italmas, as well as the Eleron-3, Eleron-7, Orlan-10, Orlan-30, Zala variants, and Supercam drones, to name a few. The quantity of different aerial drone types used in this war is unprecedented, especially as tens of thousands of tactical FPV-type UAVs are used every month. This scale of use, coupled with high Russian UAV losses due to Ukrainian countermeasures, therefore requires continuous drone manufacturing pipelines. + +Indeed, there are indicators Russia is ramping up manufacturing for the entire drone lineup. For instance, the Kalashnikov Concern, a Rostec subsidiary manufacturing combat weapons, has converted a shopping center in the Russian city of Izhevsk into a drone manufacturing plant to make the Italmas drones. The latter are new Russian UAVs — similar to, yet cheaper than, the Iranian-made Shahed drones — which have been increasingly used in recent months in Ukraine. In May 2023, Kalashnikov’s president said the company would be able to increase the number of UAVs produced, including loitering munitions and reconnaissance drones, “by several times” in 2024. While it is difficult to confirm exact production numbers, the Russian MOD has boasted about sending 22,000 drones to the battlefield in 2023. + +___`One of the biggest developments in this war, especially for 2023, was the rapid emergence and scaling up of the so-called Russian loitering munitions kill chain.`___ + +Iranian-made UAVs or drones modeled after them have played an important role on the battlefield. According to a senior NATO official, each month Russia is producing between 300 to 350 one-way attack drones based on a model provided by Iran. For instance, Russia has increased production of Geran-2 drones — a Russian name for the Iranian-made Shahed-136 loitering munitions that have played an important role in the war by striking Ukrainian stationary civilian and military targets such as energy infrastructure and key industrial facilities (a tactic that remains relatively unchanged since the fall of 2022, when the drones were first introduced). To increase the capacity of these UAVs, Russia has inaugurated a massive factory in Alabuga, east of Kazan, with an ambitious goal of manufacturing anywhere from 6,000 to 10,000 Geran-2 drones. By the end of 2023, Russian forces had already fired an estimated 3,700 Geran-2 drones inside Ukraine, indicating a growing reliance on this weapon as a complement and surrogate to long-range missiles. + +Another Russian military go-to drone is the Lancet loitering munition lineup, with more than 1,000 recorded uses of this drone by February 2024 against Ukrainian high-value targets such as Western-provided long-range and precision artillery. However, recently, Lancet production has proved vulnerable, with Ukraine likely targeting Russian defense enterprises that manufacture components for this UAV. For instance, there was a huge explosion at the Zagorsk Optical-Mechanical Plant (ZOMZ) in August, which may have been producing components for Lancet drones. + +Besides these attack drones, the Russian military continues to rely on commercial UAVs such as the Chinese-made DJI and Autel, which are popular systems for conducting ISR and precision-drop missions. Yet the most common and increasingly valuable drone across the Russian force is an FPV-type drone assembled almost entirely from Chinese-made commercial components. Such drones typically cost less than $500 to assemble and can carry a variety of weapons and munitions at nearly 100 miles per hour to target. Since an operator can maneuver an FPV drone to strike any desired spot or location with precision, they have become increasingly dangerous to all vehicles and soldiers on the field, including even well-protected tanks. + +Unlike most of the military drones mentioned, practically all FPV-type drones are assembled by the country’s sprawling volunteer effort, which includes individuals, organizations, start-ups, and enterprises that fundraise for support among regular Russian citizens as well as wealthy individuals and regional governments. In 2024, FPV drones, along with ISR UAVs providing overwatch, have become so effective that they affect how both forces are fighting, requiring changes to logistics, evacuation, maneuvering, transportation, and other requirements for troops and weapons. The sheer quantity of Russian FPV drones is difficult to estimate. In late 2023, Ukrainian volunteers and military estimated that the number of Russian volunteer-built FPV drones and light quadcopters may total around 300,000 per month. While this number may seem extremely high (especially in light of official Russian MOD data stating the Russian military received roughly 22,000 drones of all types via official MOD channels in 2023), some Russian volunteers boast their specific nationwide assembly efforts can build up to 100,000 FPVs per month, or even greater numbers when other efforts are included in the total. Such numbers, even if exaggerated, imply a continuous and practically uninterrupted flow of Chinese components (discussed in detail in the following section) to numerous Russian volunteer efforts and indicate that the Russian military will come to increasingly rely on FPV drones as cheap, expendable tactical weapons well into 2024 and beyond. + +Indeed, realizing the battlefield impact of both commercial and military drones, the Kremlin will likely continue deploying these cost- and time-effective weapons throughout 2024. In January 2024, the Russian MOD pledged a significant uptick in drone production for the military encompassing practically all drone types, from short-range FPV-type and ISR drones to mid- and long-range reconnaissance and combat models. It reportedly is even pushing ahead with introducing additional new drone designs. + +#### Missiles + +Despite the increasing significance of drones, the Russian military continued to rely on its tactical and long-range precision strike missiles to attack Ukrainian targets in 2023. By the end of last year, Russia had fired off an estimated 7,400 missiles into Ukraine since beginning its invasion. The pace of missile use ebbed and flowed, however, and the Russian military often fired its missiles together with Geran-2 drones to aid in penetrating Ukrainian air defense and increase their lethality. In one such attack in December 2023, Russia launched more than 100 missiles and dozens of drones against Ukrainian civilian targets. + +According to Western officials, Russia limited its cruise missile strikes in the second half of 2023 in an effort to build up stockpiles for attacks in 2024. The Russian MOD’s use of Iskander-M, Kinzhal, Kh-22, Kh-47, Kh-101, and other missiles is also expected to increase in 2024 as the domestic defense industry ramps up missile production. Estimates have varied regarding the exact number of missiles Russia is capable of producing. In May 2023, for instance, Ukrainian intelligence found that Russia manufactured around sixty cruise missiles, five Iskander ballistic missiles, and two Kinzhals per month. In June 2023, the Ukrainian government noted it continued to discover Western-made microelectronic components among the wrecks of Russian missiles that were likely sourced from partners like China. + +Assessments regarding Russia’s domestic missile production capacity started to change in September 2023, when different Russian weapons manufacturers promised to ramp up missile production efforts. For instance, the JSC Tactical Missiles Corporation — a state-run defense company specializing in missile production — said in September 2023 it had doubled production of precision weapons and, in certain cases, had increased production by as much as 3.5–5 times. In November 2023, a Ukrainian investigative team reported an expansion at the Dubna Machine-Building Plant, which is owned by JSC. At around the same time, Kalashnikov also promised to more than double production of Vikhr anti-tank missiles and Kitolov laser-guided artillery shells by opening two new facilities to speed up this effort. Due to these and other similar activities, some Western analysts have recently estimated that at the beginning of 2024 Russia may have increased its stockpile to 200 Iskander 9M723 ballistic and 9M727 cruise missiles, along with other missile variants. + +Going forward, Russia will likely launch these missiles together with Geran-2s, using the aerial drones to identify and target Ukrainian air defenses and then flying the missiles through or even around corridors cleared of most active air defense. Such a combined salvo could be a game changer in this war given a growing stock of Geran drones relative to Russia’s overall missile force use in Ukraine. Indeed, according to Ukrainian estimates, since the beginning of 2024, the Russian Armed Forces have already used almost 1,000 missiles and about 2,800 Geran drones against targets in Ukraine. + +#### Electronic Warfare Systems + +Electronic warfare (EW) systems remain the most active and capable countermeasures against most drones that permeate the Ukrainian battlefield. With thousands of UAVs in the air at any given time, both sides in this war have invested considerable resources into EW systems, concepts, and tactics. At this point in the war, the Russian military likely maintains an advantage over Ukraine when it comes to EW tactics, techniques, and procedures and has numerous EW systems fielded across the front, though this does not necessarily translate into more capacity to intercept Ukrainian aerial drones. In 2023 and beyond, the Russian defense industry continued to field a significant number of EW systems, ranging from large wheeled stationary complexes to portable systems transportable by light vehicles to individual soldier systems such as handheld counter unmanned aerial system (CUAS) rifles. + +Sample Russian EW systems include the Serp stationary complex, designed to counter different UAV types, as well as Sania and ORK, specifically designed to counter the kind of FPV-type drones Ukrainians have deployed against their Russian opponents. Other commonly used systems include Lesochek, designed to counter FPV drones and light quadcopters, which can be mounted on vehicles and tanks. In 2023, there was a notable shift away from the very large systems present in 2022 — such as Krasukha — which emit a lot of electromagnetic radiation and, in turn, can be attacked by Ukrainian missiles, high-precision artillery, or even drones, toward smaller portable systems such as Antidrone and Pole-21, which can be quickly assembled and fielded close to the front lines. Russian volunteers can purchase other EW devices, such as light Chinese-made CUAS rifles, from commercial manufacturers and deliver them directly to the front. Western analysts note that Russian EW systems require high-tech components that have commercial origins, such as amplifiers, synthesizers, and software, indicating the Russian defense industry’s continued reliance on imports and international partners to acquire such technologies. Various EW systems and tactics will take center stage for the Russian military in 2024, along with the large-scale use of drones and artillery to hold off Ukrainian attempts to break out of the current stalemate. + + +### Part II Russia’s Evolving Import Diversification Efforts + +As demonstrated in the previous section, Moscow has more actively pivoted to lower-cost weapons, such as less advanced tanks, armored vehicles, artillery, and expendable UAV types, which continue to be effective on the battlefield. By contrast, more high-tech weapons, such as advanced combat aircraft and helicopters and long-range missiles, are less frequently used during combat. Therefore, in terms of the key components and electronics the Kremlin needs for its war machine, it has moved away from tailored high-end military components toward dual-use or even purely civilian technologies. As a consequence, the composition of Russia’s suppliers has also changed as more military goods flowing into Russia are sourced from civilian or dual-use suppliers. Accordingly, in 2023, fewer Russian military companies were being sanctioned, and more companies that have a principally civilian footprint but are supplying Russia’s war effort have now found themselves on sanctions lists. These shifts in military supply chains have become a key challenge for sanctions investigators and are explored in greater detail below. + +___`[Russia] has moved away from tailored high-end military components toward dual-use or even purely civilian technologies. As a consequence, the composition of Russia’s suppliers has also changed as more military goods flowing into Russia are sourced from civilian or dual-use suppliers.`___ + +#### Methodology + +CSIS experts tracked and analyzed the international procurement and distribution networks Russia has relied on to gain critical components — also referred to as key military goods for the purposes of this research — needed for its war effort. This analysis proceeded in three main steps: (1) determining the list of key military goods critical for Russia’s defense industry, (2) identifying main trends in the supply of these goods into Russia, and (3) examining individual companies and actors involved in their supply to Russian actors. + +Initially, the research team identified the goods most in demand within Russian military industrial production circles throughout the last year of the war. To do so, the team relied on the list of high-priority items issued jointly by the sanctions and export control enforcement authorities of the United States, United Kingdom, European Union, and Japan. This list, divided into four tiers, consists of items designated by their harmonized system (HS) codes at the six-digit level that pose a heightened risk of illegal diversion to Russia due to their criticality to its war machine. Tier 1 includes specific electronic integrated circuits, which play a key role in the production of advanced Russian precision-guided weapons systems. Russia currently lacks capacity to manufacture these items domestically, and the number of global manufacturers making these goods is also limited. Tier 2 includes certain electronic items, such as switching and routing apparatus and radio navigational aid apparatus, for which Moscow may have some domestic production capability, but it prefers to source them from Western countries, including the United States. Tiers 3 and 4 consist of items such as ball bearings and computer numerical controlled (CNC) machine tools and components that are critical to Russia’s war effort but may be acquired from a broader range of global suppliers. + +This list was then supplemented with additional goods gleaned from open-source reporting on Russia’s sanctions evasion efforts. Those were identified based on their prevalence in open-source reporting channels, including Telegram and other social media channels, and then mapped to corresponding HS codes at the level of six digits. This allowed the research team to identify additional import and export patterns for key goods, such as fiberglass, brushless motors, and quadcopter blades. + +The team then supplemented the above two goods categories with additional HS codes derived from the historical trade practices of sanctioned Russian companies. Two years into the war, international sanctions enforcement bodies have publicly designated a significant number of companies and individuals for their involvement in Russia’s military procurement efforts. CSIS, in consultation with trade and supply chain data experts, analyzed the historical procurement activities of these firms, assembling lists of key HS codes procured by these companies since the beginning of the full-scale invasion. As a result, the research team created a consistent, representative sample of key military goods necessary to the continued functioning of Russia’s military industrial complex. In total, the team identified 409 distinct HS codes at the level of six digits — all corresponding to items frequently bought or sought by Russia’s military industrial companies. + +Next, the CSIS research team, following conversations with trade data analysts, identified key aggregate trends in the supply of goods from the sample into Russia as well as the Russia-led Eurasian Economic Union between January 2022 and July 2023 to capture both direct imports and shipments at risk of diversion. The research team analyzed major temporal trends as well as important shifts in the composition of the country of origin by good over time. + +Finally, CSIS identified individual companies and actors involved in the supply of key military goods to Russian actors. In particular, the research team focused on one China-based organization that supplies drone motors and other components to multiple Russian companies, including companies that have previously been sanctioned for military procurement. Importantly, these same companies at times also supply Ukrainian actors with critical drone parts, pointing to complicated trade-offs in sanctions policy. + +#### General Trends + +Overall, global supply chain data analyzed by CSIS shows that Russia has been continuously adapting its purchasing patterns, which enabled it to bypass sanctions and acquire components for its defense industrial base. Since the beginning of the invasion, electrical machinery and equipment, including microelectronics, have comprised around one-third of the total imports of key military goods, reflecting the importance of electronics for Russia’s new brand of warfare (see Figure 1). The volume of key military goods imports increased sharply in the months following the declaration of partial military mobilization in September 2022, surpassing 500,000 total transactions since the beginning of 2023 (see Figure 2). + +![image01](https://i.imgur.com/JGlSKGt.png) +_Figure 1: Breakdown of Russian Imports of Key Military Goods by HS Chapter_ + +![image02](https://i.imgur.com/mAemsbs.png) +_Figure 2: Volume of Russian Imports of Key Military Goods_ + +Indeed, throughout the war, and especially in 2023, Russia has doubled down on its import diversification efforts for key military goods, further pivoting away from the West and developing both official and unofficial channels of communication with “friendly nations” across the Asia Pacific and Middle East. According to General Valery Gerasimov, the chief of the General Staff of the Russian Armed Forces, “The Russian Defense Ministry continued boosting rates of interaction with foreign military agencies within military and military-technical cooperation, with more than 600 major events implemented” in 2023. The CSIS analysis (see Figure 3) also confirms a significant shift has occurred in the composition of Russia’s trading partners for key military goods, with direct prewar Western suppliers mostly being replaced by Chinese suppliers as well as shell companies located in Hong Kong, Turkey, India, and Vietnam, among others. + +![image03](https://i.imgur.com/SILMjzw.png) +_Figure 3: Russian Imports of Key Military Goods by Country of Origin_ + +Similarly, the distribution of the companies both supplying and procuring key military goods has seen a significant shift since the beginning of the war and the ongoing campaign of sanctions imposed by the West. Figure 4 shows the import trends associated with the top five suppliers of microelectronics into Russia since March 2022, irrespective of country of origin or sanctioned status. Interestingly, nearly all of the top exporters of microelectronics are based in China and Hong Kong, with one entity based in Turkey. Data obtained by CSIS further show many of the most significant importers of electronic goods have emerged since the declaration of partial military mobilization in September 2022, indicating the principal importers of important electronics into Russia are not themselves long-standing firms but likely shell companies. + +![image04](https://i.imgur.com/RUv4o8u.png) +_Figure 4: Russia’s Top Five Microelectronic Supplier Companies_ + +Likewise, there was significant change in the breakdown of Russian importers of electronic goods in the period studied (see Figure 5), with small procurement vehicles showing up as some of the most prominent importers of microelectronics into Russia since March 2022. + +![image05](https://i.imgur.com/oGT2jQ1.png) +_Figure 5: Top Five Russian Importers of Microelectronics into Russia_ + +Building on the general trends highlighted in the trade data analysis, the research team looked deeper into the key countries that directly and indirectly supported Moscow’s war effort throughout 2023, including China, Turkey, North Korea, and Iran, among others. Taken together, these countries have shipped not only military weapons and sanctioned dual-use goods, but also civilian and commercial technologies into Russia, including construction equipment, which have helped Russia put up a resilient defense against Ukraine’s 2023 counteroffensive. Finally, in the case of China, CSIS analyzed Beijing’s trade patterns with Moscow to illuminate China’s role as the most important country enabling Russia’s war effort. + +___`Many of the most significant importers of electronic goods have emerged since the declaration of partial military mobilization in September 2022, indicating the principal importers of important electronics into Russia are not themselves long-standing firms but likely shell companies.`___ + +#### China + +China has been Russia’s key defense partner throughout this period, providing direct and indirect support to Moscow’s military machine. By 2023 — despite the threat of Western secondary sanctions — Chinese supplies to Russia fully replaced imports from Europe, the United States, South Korea, and Taiwan, as trade between the two countries hit a record high of $240 billion, growing 26.3 percent from 2022. Chinese shipments to Russia jumped 46.9 percent from 2022 to 2023 and 64.2 percent from 2021 to 2023. Having surpassed the European Union and become Russia’s largest trade partner, China now exports to Russia a significant share of dual-use items and technologies, from much-needed electronics to drones. + +More precisely, throughout the war, China has sold millions of dollars’ worth of semiconductors, chips, ball bearings, navigation equipment, parts for fighter jets, and other components to Russia. This has ultimately enabled the Kremlin to speed up its weapons production, including armor, artillery, missiles, and drones, and put up an effective defense against Ukraine’s 2023 counteroffensive. For instance, according to some estimates, Beijing’s overall share in Russian imports of machine tool parts jumped to 32 percent in 2022 and to 80–90 percent in 2023, while Chinese imports of metalworking machine tools to Russia grew to nearly 60 percent in 2022 and about 90 percent in 2023. In November 2023, Chinese year-to-date total exports of ball bearings to Russia were also up 345 percent from the same period in 2021, while exports to Kyrgyzstan, also likely subsequently routed to Russia, were up around 2,500 percent. + +An investigation by CSIS captured noteworthy shifts in Sino-Russian trade patterns surrounding a meeting between Chinese president Xi Jinping and President Putin in March 2023 (see Figure 6). For instance, narrowing in on imports of the Tier 3 high-priority items (specific electronic and mechanical components used in Russian weapons systems), as defined by multinational sanctions authorities, Beijing’s importance as a supplier of these goods comes through strongly. There was a sudden influx in shipments of high-priority items from China to Russia in March 2023, when President Xi visited Russia. + +In addition to the Tier 3 high-priority items, Russian imports of CNC machines (Tier 4) — which are used to provide precise parts for various weapons systems from ammunition to aircraft — from Chinese companies also experienced a sharp increase in the months following the Xi-Putin March 2023 meeting. + +![image06](https://i.imgur.com/2yJu3LA.png) +_Figure 6: Russian Imports of Tier 3 High-Priority Items by Sender Country of Registration_ + +![image07](https://i.imgur.com/MoBjAW9.png) +_Figure 7: Russian Imports of CNC Machines by Sender Country of Registration_ + +While examining these aggregate trends is useful for understanding general war-related Sino-Russian trade patterns, it is ultimately individual companies that furnish components for Russia’s war machine that are the targets of U.S. and allied sanctions efforts. CSIS has looked deeper into Russian imports of drone parts from Chinese companies due to the increasing significance of UAVs in Ukraine, as highlighted in the previous section. In April 2022, China’s biggest drone manufacturer, DJI, which has a more than 90 percent share of the global consumer drone market, announced it would discontinue its businesses in Russia and Ukraine, shutting its flagship stores and halting most direct sales to those countries. However, according to public reporting, while Ukraine faced some issues acquiring DJI-made drones due to the ongoing sales ban, these products and relevant components were imported to Russia in substantial numbers between 2022 and early 2024 through complicated networks of intermediaries. Within the first six months of 2023, Russia received at least $14.5 million in direct drone shipments from Chinese trading companies, while Ukraine received only around $200,000 worth of shipments. Even though Ukraine still managed to obtain millions of dollars’ worth of Chinese-made drones and components, most came from European intermediaries. + +Illustrating this point, the research team identified a network of foreign firms that have supplied sanctioned Russian actors, including Entep and Altrabeta (see Figure 8), with drone components throughout 2022 and 2023. Principally based in China and Hong Kong, with strong intermediary activity in Turkey, these firms have shipped goods including batteries, propellers, and motors — all explicitly designated for the production of quadcopters and multicopters — to Altrabeta and Entep in Russia as late as July 2023. Nearly identical shipments have also been made to companies in Russia that have not yet been placed on sanctions lists. In addition to direct supplies into Russia, these firms have supplied companies in intermediary jurisdictions, such as Turkey, which have then made exports of similar products into Russia. + +But while these companies are likely suppliers of drone components to companies affiliated with Russia’s military industrial sector, Russian firms are not their only clients. Some of the same Chinese and Hong Kong companies that trade with Russia’s military suppliers also supply Ukrainian firms that supply the Ukrainian military. This points to a potential dilemma in the current Western sanctions strategy: while it is possible to sanction firms based on their connections to Russia’s defense industry and war effort, doing so could endanger ongoing Ukrainian procurement, perhaps in ways that are not at first obvious without full multitiered supply chain visibility. + +![image08](https://i.imgur.com/2gF3TH8.png) +_Figure 8: Visualization of Trade Networks of Sanctioned Russia-based Firms Altrabeta and Entep_ + +In addition to components and technologies with overt military applications, the Kremlin has increased imports of goods that are not usually restricted by the international sanctions regime but nonetheless play an important role in Beijing’s contribution to Moscow’s war effort. For instance, Russia has significantly increased imports of Chinese-made trucks and digging and dirt-moving equipment, helping Russian troops entrench into and transport through occupied Ukrainian territories. Chinese shipments of Aramid fiber to Russia — a class of heat-resistant synthetic fibers used in bulletproof vests — also rose more than 350 percent between 2021 and 2022, while in January and February 2023 alone, imports of this material had already reached half of 2022’s full-year total. + +___`Some of the same Chinese and Hong Kong companies that trade with Russia’s military suppliers also supply Ukrainian firms that supply the Ukrainian military. This points to a potential dilemma in the current sanctions strategy.`___ + +Recently, Putin has stressed that Moscow and Beijing should seek greater cooperation in the high-tech sector, from joint production of higher-end microchips in the Russian Federation to construction of high-orbit assets for space. Overall, as the Kremlin continued to pivot its defense industrial base away from the West throughout 2023, the role of China as an important defense and security partner increased dramatically. Beijing has helped ease pressure on Russia’s defense industrial sector by providing vital equipment and technologies to help Russian forces wage a long war of attrition against Ukraine. + +#### Turkey + +Turkey’s position on Russia’s invasion of Ukraine has been equivocal. On the one hand, Ankara has provided diplomatic support to Kyiv, refusing to accept Moscow’s illegal seizure of Ukrainian territories and playing an important role in securing Ukraine’s seaborne exports, including through a grain deal brokered jointly with the United Nations in July 2022. On the other hand, Ankara has never joined the Western sanctions regime. Instead, it has become one of the top buyers of Russian crude oil and one of Russia’s key suppliers of the restricted dual-use goods required to build cruise missiles, drones, and helicopters. + +According to the Financial Times, in the first nine months of 2023, Ankara reported $158 million in exports of 45 goods designated high priority by the allied sanctions enforcement agencies to Russia and five former Soviet countries — Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, and Uzbekistan. This number was three times the level recorded over the same period in 2022. Interestingly, while Turkey has officially recorded a surge in declarations of exports of high-priority items to the five ex-Soviet states, statistical agencies in these countries have not documented a matching rise in imports. Some analysts have suggested that the trade data discrepancies can indicate that those items reported by Ankara as destined for the intermediary countries were instead shipped directly to Russia. For instance, while Kazakhstan recorded $6.1 million of imports of high-priority goods from Turkey between January and September 2023, Turkey’s data showed that exports of those items to Kazakhstan reached $66 million over the same period. + +However, more recently, Turkish-Russian trade seems to have been affected by the executive order signed by U.S. president Joe Biden in late December 2023 threatening financial institutions doing business on behalf of those targeted by U.S. sanctions with the risk of losing access to the U.S. financial system. According to a Reuters exclusive, initial data following issuance of the order showed Turkish exports to Russia decreasing by 39 percent year on year to $631 million in January 2024 and imports from Russia declining by 20 percent to $4 billion. This has reportedly affected Ankara’s role as a supplier of dual-use goods to Moscow as “exports of machinery, in particular, stopped simply because of the similarity with military equipment,” according to a Reuters source familiar with this matter. In February 2024, the Biden administration announced new trade restrictions on 93 entities, including 16 from Turkey (the second-highest total after Russia), which may act as an additional deterrent for other Turkey-based companies helping Russia circumvent sanctions. Yet considering Russia’s adaptability to the sanctions regime, it remains to be seen if this impact will be long lasting. + +#### North Korea + +Defense cooperation between Russia and North Korea reached a new level in 2023. In September, North Korean leader Kim Jong Un visited President Putin, triggering global concerns about deepening military cooperation between these two countries already in opposition to the West. During the trip, Kim and Putin visited the production sites for military aircraft at Komsomolsk-on-Amur and the Russian Pacific Fleet at Vladivostok, as well as the Vostochny Cosmodrome, a Russian spaceport. Shortly after the visit, CSIS reported increased activity at North Korea’s Tumangang rail facility bordering Russia, suggesting the dramatic increase in rail traffic could indicate North Korea was supplying Russia with arms and munitions as part of military-technical cooperation agreements the two leaders might have signed back in September. + +In the months that followed, different countries accused North Korea of selling weapons to Russia, including the United States and South Korea. In October, the White House announced Pyongyang had delivered more than 1,000 containers of defense equipment and munitions to Moscow to support its war effort. Shortly after, South Korea’s National Intelligence Service (NIS) claimed North Korea had sent over one million artillery shells to Russia by sea, which were then conveyed by train to Ukraine. NIS estimated those deliveries would keep Russian troops supplied for two months. In January 2024, South Korean defense experts said North Korea might have provided as many as 5,000 containers of weapons to Russia as of the end of December 2023, potentially holding around 2.3 million rounds of 152 mm shells, or around 400,000 rounds of 122 mm artillery shells. At the same time, Washington revealed new information suggesting that Russia in its recent strikes against Ukraine had used short-range ballistic missiles sourced from North Korea. U.S. national security spokesperson John Kirby called Pyongyang’s arms transfer to Moscow a “significant and concerning escalation” and said the United States would introduce additional sanctions against those involved in such arms deals. A South Korean envoy stated Ukraine has become a test site for North Korea’s nuclear-capable missiles. A recent CSIS report also found that since August 2023 there have been at least 25 different visits by vessels to North Korea’s port of Najin, to load munitions destined for Russia. Additionally, at least 19 “dark vessels” — vessels that have their automatic identification system (AIS) transmissions turned off to avoid outside detection — have visited Russia’s Vostochny Port to both unload and load containers. + +It is believed Kim expects that, in exchange for North Korean munitions, the Russian defense ministry will provide advanced technologies and know-how to boost North Korea’s military, nuclear, and space programs. In fact, Moscow may have already helped Pyongyang successfully launch its military reconnaissance satellite in late November 2023 — two months after the Kim-Putin summit in Russia. This success followed two failed attempts in May and August of the same year. According to CSIS analysis, there is “a strong causal connection between Russian support and the pre-summit and post-summit launch results.” Putin has also suggested Russia would help North Korea develop its space satellite program, while sources close to the Russian defense ministry have said the ministry is looking for ways to deepen collaboration with Pyongyang, including organizing joint scientific conferences. Should North Korea develop fully functional military satellite capability with Russian assistance, it would be able to acquire real-time information about U.S. and South Korean military activities on the peninsula. + +Overall, 2023 saw a strengthened defense industrial partnership between Russia and North Korea, which has not only benefited the Russian military but also violated the UN Security Council’s sanctions resolutions on Pyongyang and undermined Western nonproliferation efforts. As long as the war of attrition continues, the Kremlin will likely seek to continue importing North Korean munitions, in return sharing sensitive defense technology and know-how with Kim’s regime. + +#### Iran + +Iran has been playing an important role in supplying Russia with combat drones. According to Kyiv, Moscow has launched at least 3,700 Iranian-made Shahed attack drones targeting Ukraine’s military and energy infrastructure as well as its major cities and civilian neighborhoods since September 2022. While Kyiv has been successful at shooting down up to 80 percent of those drones, such continuous mass attacks have been overwhelming Ukraine’s air defenses and have intensified in recent months, with around 10–15 Ukrainian regions engaged in shooting down Shaheds every night. While Iran has admitted selling Moscow drones before the war started, it has denied supplying Russia with military aid for the war in Ukraine. + +Existing evidence indicates the contrary. Throughout 2023, multiple reports covered Russia and Iran’s plans to construct a new factory in Russia’s Tatarstan region that could build at least 6,000 Iranian-designed Shahed drones (also known as Geran-2s in Russia) by 2025. In February 2024, evidence emerged of plans to build as many as 10,000 Shahed-type drones in Russia, indicating Moscow’s increasing demand for this UAV as one of its go-to weapons against Ukraine. Production of Shaheds in this factory would reportedly include improving Iranian fabrication processes and ultimately advancing the drone’s capabilities. Satellite imagery from November showed progress in plant construction, including new structures and security perimeters with checkpoints. Images also suggested that the buildings where the drones are being made were already operational. While the current production rate at this plant remains unknown, recent estimates have suggested that Russia produces up to 350 Shahed drones monthly. + +In addition to Russo-Iranian cooperation on drones, Iran has sent Russia at least 400 short-range Fateh-110 ballistic missiles since January 2024. According to defense experts, these road-mobile missiles are accurate and reliable systems, capable of striking targets at a distance of 300–700 kilometers (186–435 miles), and Russia could successfully use them on the battlefield in Ukraine. Additional shipments from Iran might be on their way: according to 2022 U.S. Central Command estimates, Iran had over 3,000 ballistic missiles in its arsenal. Yet, based on Estonian intelligence assessments, while delivering Iranian ballistic missiles to Russia would mark an advancement in Russo-Iranian relations, it probably will not offer Russia a significant breakthrough in Ukraine, as Iran has insufficient capabilities to supply Russia with large quantities of missiles over an extended period. In return for the missiles, the Kremlin has allegedly offered unprecedented defense cooperation to Tehran, including selling attack helicopters, radar systems, and combat trainer aircraft in addition to the advanced Su-35 fighter jets Iran has publicly declared it wishes to purchase from Russia. + +Russia’s and Iran’s decisions to move away from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) payment system for cross-border transactions by the end of 2023 might further encourage arms sales between the two countries. According to the deputy head of the Central Bank of Iran, Tehran and Moscow will set up a direct interbank transfer mechanism allowing companies in both countries to trade in their respective national currencies (rials and rubles) instead of dollars or euros. A currency agreement between the two parties is expected to be signed in 2024. Should the agreement come into effect, it could ease, as well as encourage, larger-scale Russo-Iranian arms transfers, thus aiding Russia’s war in Ukraine and logistically strengthening defense-military cooperation between the two countries. + +#### Other Noteworthy Actors + +__UNITED ARAB EMIRATES__ + +Similar to Turkey, the United Arab Emirates (UAE) — traditionally a Western ally but also a member of the Organization of the Petroleum Exporting Countries Plus (OPEC+) oil alliance, together with Russia — has refused to take sides or join the Western sanctions regime against Russia. Thanks to this approach, it has attracted Russian money and businesses fleeing increasingly hostile jurisdictions in other parts of the world. In addition to becoming a hub for the Russian business community, the UAE has seen a surge in imports of dual-use goods from Europe and the United States, many of which have found their way into Russian weapons and systems used in Ukraine. + +In November 2023, against the backdrop of multiplying Western concerns regarding the UAE’s role as a gateway for Moscow to circumvent sanctions, it agreed to restrict the re-export to Russia of sensitive goods with military applications in Ukraine. Reportedly, the UAE would expand its import and export control list by including the items designated as high priority by the allied sanctions enforcement agencies. Four companies from the UAE have also recently become subject to U.S. sanctions due to their association with Russia’s war machine. Overall, while the UAE has undoubtedly benefited from the position it has adopted vis-à-vis the Russia-Ukraine war, attracting ostracized Russian billionaires, it also values its economic and security relationship with the West and thus could become more willing to respect the Western export control measures. + +__INDIA__ + +The most notable aspect of the Russo-Indian relationship after the full-scale invasion has been New Delhi’s purchase of discounted Russian crude oil. But India has also supplied Russia with engineering items, including auto parts and electrical equipment and machinery with direct or indirect military applications. According to Reuters, India’s exports of these goods to Russia increased by 88 percent between 2022 and 2023, while for the April–December period exports increased by 130 percent, standing at $1.03 billion. Furthermore, it has also been argued that Moscow might be buying back military supplies it had previously sold to New Delhi, including parts for night vision to enhance performance of Russian missiles at night and in low light. However, given growing risks of secondary sanctions associated with the executive order signed by President Biden in late December 2023, such aspects of Russo-Indian trade might be curtailed in 2024. + +__KAZAKHSTAN AND UZBEKISTAN__ + +Officially, Kazakhstan and Uzbekistan remain neutral in the Russia-Ukraine war. At the same time, both countries have supported the sanctions decisions of Washington and Brussels on cooperation with Russian companies involved in the war against Ukraine. Still, according to the Organized Crime and Corruption Reporting Project, Kazakhstan and Uzbekistan have been playing an important role in supplying Russian companies with cotton pulp, which is used in the production of gunpowder and other propellants. Within the past decade, these countries have supplied over 98 percent of Russia’s imported cotton pulp, with the trade growing since Russia’s invasion of Ukraine. Since May 19, 2023, the cotton pulp under HS code 470610 has been included in the U.S. export controls list, and since June 24, 2023, in the relevant EU list. In view of this, the Western sanctions authorities may tighten export and re-export controls for these types of goods. The introduction of new trade restrictions on producers of raw materials from Kazakhstan and Uzbekistan may become an additional deterrent to other companies that help Russia circumvent sanctions. + + +### Part III Existing Russian Military Industrial Vulnerabilities + +This section provides an overview of Russia’s key remaining defense industrial weaknesses and explains their potential impact on the Kremlin’s war effort going forward. + +#### Reconstitution Rate + +Despite its capacity to manufacture weapons systems for an ongoing war, Russia is severely depleting its reserve stockpiles to sustain its war effort. This is especially salient when it comes to Russia’s tank force, which is increasingly fielding older models that were fully or partially modernized and upgraded, and in some cases not upgraded at all. Therefore, many predictions about Russia’s capabilities have to take into consideration the ability to rebuild its force structure in the face of continued losses at the hands of determined and experienced Ukrainian forces. It is likely that in 2024 and possibly into 2025, Russia will continue to draw on its older stocks of Soviet equipment to bolster its forces, as newer equipment will be fielded alongside more numerous systems that are many decades old. + +#### Ammunition Shortages + +While Russia dominates Ukraine in terms of artillery advantage, a new RUSI report flags that Russia still faces ammunition manufacturing challenges. While Russia is firing artillery shells at a much higher rate than Ukraine, the rate is still lower than it was in 2022. It is not believed Moscow is producing enough to replenish what it is using. According to Paul Schwartz, a nonresident senior associate with CSIS, + +> While the ammunition production is improving, Russia is not quite there yet in terms of self-sufficiency. In other words, Russians are still using artillery at faster rates than they can replenish it, although they are closing the gap. To sustain a 10,000 shells per day (and 300,000 shells per month) rate, the Russian defense industrial base would need to produce 3.6 million shells per year. + +Beyond achieving self-sufficiency, Russia would require even more ammunition to attain further territorial gains in Ukraine. By the Russian MOD’s assessments, it needs to manufacture or source approximately four million 152 mm and 1.6 million 122 mm artillery shells in 2024 to achieve significant territorial breakthroughs in 2025. However, the Russian defense industry has reported it can only increase 152 mm production to 1.3 million and 122 mm production to 800,000 rounds in 2024. While Moscow increased its supplies by seeking out alternative sources of ammunition from other countries, this is not a sustainable solution. With current military industrial production at capacity, the MOD does not believe it can significantly raise production in subsequent years unless even larger investments are made in building new capabilities. + +#### Inflationary Pressures + +Russia is experiencing significant inflation. In January 2024, official annual inflation figures came in at 7.28 percent, but a survey commissioned by the Central Bank of Russia (CBR) placed inflation expectations at 12.7 percent and growing. Inflation is driven primarily by elevated government spending to procure supplies and services to support the war effort and by elevated levels of social spending to support the families and dependents of soldiers. Many previously economically depressed Russian regions have benefited from the Kremlin’s defense spending splurge, with evidence documenting rising salaries and the expansion of defense-related industries on the ground. Another widely reported area of state subsidization exists in the Russian mortgage sector, where the total value of the mortgage portfolios in Russia’s banking system hit a record year-on-year increase of 34.5 percent in 2023, exceeding the increase of 20.4 percent in 2022. An additional contributor to inflationary pressure is the weakened ruble, which in 2023 has repeatedly crossed the symbolic threshold of 100 rubles to the dollar. Due to Russia’s high dependence on imported goods, the ruble’s sluggishness creates an added expense, acting like a secondary tax on the Russian economy. + +To combat inflation, the CBR has raised the interest rate to 16 percent, above that of the National Bank of Ukraine, while Putin issued a temporary decree in October 2023 ordering Russian exporters in major industries to convert nearly all their foreign currency earnings into rubles to boost demand for the Russian currency. Such capital control measures can help stabilize a currency, but they also risk triggering further capital outflows, devaluation, and a spike in inflation. + +Overall, the stress on Russian defense industrial enterprises is starting to become public, even as the Kremlin tries to put the most positive spin on the country’s economic performance. In a February 2024 communication intercepted by anti-Russian hackers, Dmitry Fadeev, CEO of the Murom Machine-Building Plant, complained that inflation and the shortcomings of Russia’s bureaucratic approach prevent plants that form the country’s military industrial complex from fulfilling government orders. Further, he said that plants are forced to sell their goods at prices set in 2019 but are at the same time expected to purchase inputs at market prices and in advance. He added that the money received from the government was not enough to cover the interest on the credit his firm would need to take out to pay its suppliers, and this money is tied up until the completion of the government contracts, which normally last three to five years. + +___`Overall, the stress on Russian defense industrial enterprises is starting to become public, even as the Kremlin tries to put the most positive spin on the country’s economic performance.`___ + +#### Labor Shortages + +The full-scale invasion of Ukraine reinforced the preexisting long-term demographic crisis in Russia. The total number of emigrants since 2022 is estimated at between 817,000 and 922,000 individuals, many of whom are young, well educated, and working in key industries like the information technology sector. Adding to this number are the 300,000 men who were mobilized into the armed forces, plus the 540,000 who, according to official reports, volunteered under contract in 2023. Overall, due to a combination of coronavirus-linked deaths, mobilization, and war-related casualties from 2020 to 2023, Russia’s labor pool lost about 1.9–2.8 million people. + +This dynamic has negatively affected Russia’s dependency ratio (the ratio of pensioners to the overall population), placing further strain on the government budget. It has also contributed to an acute labor deficit. In July 2023, 42 percent of Russian industrial enterprises reported labor shortages. This issue also came up in Fadeev’s leaked interview, in which he complained of a shortage of staff at the plants due to war-related mass mobilization and a lack of accommodation in the area. Competition for labor has put upward pressure on salaries, further accelerating inflation. + +To mitigate labor shortages, the Kremlin and the Russian business community are working to bring in laborers from other countries, including North Korea, Cuba, and Kenya. Russian industries also turned to hiring teenagers and using prison labor. Despite these atypical measures, the Kremlin strikes a confident tone on questions of employment. In February 2024, President Putin bragged about the creation of over half a million new jobs in the defense sector in the last year and a half and positively remarked on the new employees’ capacity to cover multiple shifts on the job. + +#### Stretched Arms Exports + +The Russian arms exports industry has faced significant challenges since the early 2010s due to Western sanctions on buyers of Russian weaponry, the development of competing defense industries by large historical customers such as China and India, and a fall in orders from specific customers like the Venezuelan government, which combined put pressure on Russian weapons producers. + +The full-scale invasion of Ukraine further exacerbated these challenges. The surplus of Russian defense products available for export abroad has been curtailed, as these materials are needed to supply Moscow’s forces. Some evidence suggests Russian arms producers are already overwhelmed by the scale of their domestic orders, thereby impeding sales abroad. Thus, in November 2023, Alexander Mikheyev, the general director of Rosoboronexport, noted that the industry’s primary responsibility is to fill orders needed by the Russian military to prosecute its war in Ukraine rather than conclude new contracts with foreign customers. In December 2023, the Russian ambassador in Yerevan reportedly admitted that Russian firms experienced difficulties in fulfilling certain orders purchased by the Armenian military. Russian state-owned media also pointed out that foreign demand for aircraft currently exceeds the production capacity of the Russian military industrial complex given the industry’s obligations to domestic clients. + +Furthermore, in December 2023, reports emerged that African buyers of Mi-17 helicopters were sending these systems for repairs in Poland, where factories in Lodz maintain capacity to provide upkeep for various Russian-produced helicopter models. Allegedly, Russian firms are currently unable to provide the repairs themselves, as their bandwidth for production is already overstretched by orders for the Russian state. If Russia cannot sufficiently expand capacity, Russian defense exporters risk losing their already vulnerable share of the international arms market. + +#### Failing Import Substitution in Critical Areas + +Russia has failed to achieve significant import substitution breakthroughs, particularly in high-tech fields such as mechanical and electrical engineering, robotics, infrastructure projects, biochemistry, and biopharmaceuticals. Putin has personally pointed out deficiencies in Russia’s robotics industry. In the metalworking industry, Russia imports 70–90 percent of machine tools and their components. Rostec and the Ministry of Industry and Trade have just announced a delay in the program for the supply of domestic aircraft replacing Western-made aircraft from 2024 to 2025–26. The aviation industry reportedly did not have enough time to test aircraft, and their features did not match those originally announced. + +This situation makes many of the Russian industries overreliant on EU and U.S. imports and therefore more vulnerable to sanctions. Specifically, EU countries have remained the main suppliers of components for industries like car construction, computer production, electronics, and optical products. U.S. supplies remain relatively high only in transport engineering due to aircraft manufacturing. According to a CBR survey in March 2023, 13 percent of surveyed companies have experienced a decline in their output due to issues with the import of investment goods. Particularly affected were the companies in the machine-building industry, which reported a 25 percent reduction in output and in wholesale trade (21 percent), construction (17 percent), manufacturing industries (15 percent), and transportation and storage (15 percent). + +Dependence on Western-sourced components creates bottlenecks, allowing the West to more effectively leverage the application of sanctions. While up to 40 percent of companies kept purchasing imported equipment and components through third countries, according to the CBR survey, the limited transport capacity of the Russian railways and the volume of traffic through Russia’s southern border crossings have often led to congestion issues. Further complicating the situation are the difficulties connected with making payments and sanctions enforcement by the West. Even existing sanctions have inflated the cost of components, which have risen by 30 percent for the Russian defense sector and have limited Russia’s ability to expand supplies, despite extra investment. More efficient sanctions enforcement could further disrupt supply lines. + +#### Overreliance on China + +As previous sections have highlighted, Russia’s reliance on China to provide much-needed components is growing, and Chinese imports remain one of the key factors in Russia’s ability to sustain its current military status quo. Russia has been replacing many Western products with Chinese ones, from vehicles to computer chips. However, unlike Iran or North Korea, China has not sold large quantities of heavy weapons systems or shells to Russia apart from civilian equipment with dual military uses like drones and trucks. + +China’s export of technological (such as microelectronic and drone) components proves critical for Russia’s manufacturing and assembly. For instance, Russia’s industrial sector has become fully dependent on China for machine tools, and components critical to arms manufacturing. By the Russian government’s own admission, the domestic drone industry is nearly 95–98 percent dependent on imported parts (especially electronics, engines, steering gears, and batteries), creating a path for potential long-term dependency on the Chinese defense industry. Russian finance minister Anton Siluanov pointed out in October 2023 that “almost all” of Russia’s civilian UAVs are being sourced from China. + +Such overreliance makes Russia critically dependent on maintaining good relations with China. Moreover, many of the newly imported Chinese components and types of equipment are of inferior quality, being less precise and less accurate and having shorter operational lifetimes in comparison to their Western-produced analogues. The vast volumes of imports also eliminate the incentives for Russian producers to boost import diversification and import substitution. For now, the bilateral relationship between these two states appears firm enough for Moscow not to be concerned about overreliance on China and remains a key foreign policy success for the Kremlin as it competes with the United States and its allies to forge a narrative for its actions in Ukraine. + +#### Corruption + +Historically, endemic corruption has been omnipresent in the Russian military. Bribes are demanded at every level of the armed services, including leave, certification of physical training, military rank, driver’s licenses, and avoiding disciplinary action. In the post-invasion period, this expanded to include injury certificates, awards for war participation, and exemptions from being sent on a combat mission. + +By multiple reports, at the mid level, Russian officers have exploited their positions to steal wages and fuel, manipulate budget allocations, and use conscripts for personal gain. Corruption spreading within supply chains has reduced the quality and availability of military equipment and supplies. + +By the Russian military’s own assessments, one in five of Russia’s munitions stocks are unsafe due to their age and poor condition despite being routinely fired at Ukraine. Problems have been reported regarding shortages of fuel, equipping troops with non-military-grade radio systems, lack of winter clothing, and unsafe food rations. This has often forced Russian troops to switch to donations and crowdfunding to obtain basic military equipment like medical supplies and night vision goggles. + +Corruption exists at a much larger scale at the level of military procurement, particularly in light of the many lucrative opportunities created by increased state funding, as evidenced by people continuously being sentenced for corruption-related crimes. Recent arrests have involved state corporation employees demanding bribes in exchange for funds appropriation. Corruption has systematically increased the cost of domestically procured equipment. It has also been associated with Russia’s failures to achieve its goals in import substitution areas. For example, the Russian State Armament Programme has fallen well short of its targets for navy modernization due to decades of mismanagement and corruption. Rostec was recently exposed for having attempted to pass off equipment bought on AliExpress as its own. + +___`Corruption [inside Russia] has systematically increased the cost of domestically procured equipment.`___ + +Corruption has contributed to the inefficiency of military planning and has undermined the discipline of the Russian army in Ukraine. This was most notable at the start of the war when Russia’s invasion plan was obstructed by fuel shortages and poor logistical support, preventing it from capturing Kyiv. While the Kremlin has learned from past mistakes, the sheer scale and pervasiveness of corruption will keep creating unexpected problems going forward. + + +### Part IV Russia’s Strategy in Ukraine in 2024 + +In 2024, the Russian military will likely maintain pressure on Ukrainian forces. Russia may attempt different tactics built around certain technologies like drones in order to break through Ukrainian lines. Russia’s own rapid advances are also possible, though the Kremlin may be content with watching Ukraine expend its valuable resources, with the situation becoming more complicated for Kyiv as the United States gears up for a presidential election where foreign aid will likely remain one of the key political issues on the ballot. + +The prevailing ability of the Russian military to take heavy losses is perhaps the biggest physical and intellectual obstacle to overcome for the Ukrainian military and its U.S. and European allies, who fight in order to avoid as many casualties as possible. The Russian military has sustained massive casualties in manpower and personnel since February 2022, with over 315,000 of Russia’s troops having been killed or injured on the battlefield (according to a U.S. intelligence estimate) without significant impact on the quality of the overall fighting force. Nonetheless, the Russian MOD continues to rely heavily on massed infantry attacks, sending large numbers of soldiers in waves against Ukrainian positions with the goal of wearing down Ukrainian defenses. Such tactics may therefore be used again in 2024, though there are indicators the Russian military is shifting toward better-organized combined arms combat. + +Despite continuing high casualties, evidence on the front suggests Russia has greater capacity to mobilize. In 2023, Russia was able to sustain latent mobilization through the influx of hundreds of thousands of volunteers drawn to the war due to higher wages and better social benefits. According to the Russian leadership, about 540,000 troops entered military service under contract last year. Since the start of 2024, an additional 50,000 people have reportedly been recruited for contract service. Some observers expect this mobilization effort to further intensify in the aftermath of the March 2024 presidential election in Russia. The ability to generate additional combat power over time by recruiting contract soldiers for new formations (not just mobilizing soldiers) will give Russia additional advantages on the battlefield. Notably, the Bakhmut offensive relied on numerical superiority in conducting human wave assaults, with Moscow adopting the tactic of exhausting Ukrainian defensive positions with constant assault waves. Despite massive manpower and weapons system losses in the Avdiivka, Bakhmut, Kupyansk, and Lymansk areas, Russia is still building up its forces. + +Another advantage is Russia’s volume of ammunition. Russia currently produces more ammunition than Ukraine receives and in 2024 is set to produce 1.3 million rounds of 152 mm caliber ammunition and 800,000 rounds of 122 mm caliber ammunition. While, as the previous section on Russia’s remaining weaknesses has shown, Russia is currently unable to produce ammunition at the rate needed for self-sufficiency — and its munition imports from allies such as Iran and North Korea may prove unsustainable in the long term — it nonetheless possesses superiority over Ukraine. More precisely, Russia has dominated Ukraine with an artillery fire advantage of 5:1 for much of the battle and sometimes even 12:1. The situation is so dire that Ukraine has started using FPV drones as artillery surrogates. + +Military observers noted that Russian successes in 2023 were also due to improved intelligence, surveillance, target acquisition, and reconnaissance operations where aerial drones play pivotal roles. Overall, the Russian military force simply has more resources at its disposal than the Ukrainian military, and it can make up for quality with sheer quantity. It has made massive artillery salvoes, has tens of thousands more drones in operation, has arrayed multiple EW systems at the front, has turned to decades-old tanks to plug gaps in the current tank and armored vehicle force, and can send thousands of troops to die. Mass-scale drone use by the Russian military is to be expected throughout 2024, with hundreds of thousands of FPV drones and thousands of commercial quadcopters and military-grade drones providing continuous battlefield observation and enabling drone strikes around the clock. + +Overall, analysts admit the ongoing positional warfare will require possessing advanced technologies at scale to change the outcome. The Russian military’s resilience in the face of personnel and weapons losses may enable its forces to sustain combat in Ukraine for a number of years. This is particularly true with the absence of any significant pushback from the general population and society. In the near future, Russia will likely continue to maintain pressure on Ukraine’s civilian and military infrastructure with strikes by Geran-2 and missile systems, though the overall impact of this strategy is far from clear given that the resolve of the Ukrainian government and citizens appears unshaken in the face of such sustained strikes. + +Finally, the Ukrainian government has asked for a number of Western weapons and systems that include artillery shells, air defense complexes, EW systems, counter-UAV technologies, and advanced aircraft as a way to hold back Russian forces. If Ukraine does not get these systems, the attritional balance could further tilt in Russia’s direction. This, in turn, could threaten Ukraine’s lengthy stand against and defiance of the Kremlin. Conversely, 2024 might also serve to demonstrate that even at the peak of its defense spending and defense industrial output, with the balance of forces in Moscow’s favor, Russia is still unable to achieve its objectives as outlined by Putin in 2022 and again in 2023. In the latter case, with mounting costs by 2025, Moscow might start facing growing uncertainty on the battlefield. + +___`The Ukrainian government has asked for a number of Western weapons and systems that include artillery shells, air defense complexes, EW systems, counter-UAV technologies, and advanced aircraft as a way to hold back Russian forces. If Ukraine does not get these systems, the attritional balance could further tilt in Russia’s direction.`___ + + +### Conclusion and Recommendations + +Since the onset of its full-scale invasion of Ukraine, Russia’s military industrial base has been pressured to boost its domestic production efforts against the backdrop of multiplying losses of different weapons systems and unprecedented Western sanctions and export control measures. While, in the first year of the war, Russia was largely unable to improve its domestic arms production, the analysis shows the Russian MOD was able to increase defense production multiple times over during the second year of the war. + +One of the main developments has been the rapid emergence and massive scaling up of Russian civilian and military drones providing significant ISR and assault capabilities to the Russian armed forces, often launched with missiles for a maximum impact. While Russia has also invested in the production of modern tanks, ammunition, and EW systems, CSIS research has revealed Moscow is not self-sufficient and relies on partners such as Iran and North Korea to field enough of these weapons on the battlefield. The analysis has also shown that while Russia indeed improved its domestic arms production capacity in 2023 compared to 2022, it has nonetheless continued to tap into its Soviet-era stockpiles by, for instance, refurbishing and sending its 60- and 70-year-old tanks to Ukraine. Overall, last year saw Russia transition into a long war of attrition while increasingly shifting to low-cost and lower-quality weapons systems. + +In this context, in 2023 the Kremlin moved away from Western-made high-end military components toward dual-use or even purely civilian technologies to fuel its war machine. As a consequence, Russia’s international suppliers also changed as more and more military goods flowing into Russia were obtained from civilian or dual-use suppliers primarily based in China and Hong Kong, as well as in Turkey, among others. These shifts in military supply chains have also led to more Russian and foreign companies with a principally civilian footprint finding themselves on sanctions lists. Russia will likely continue following such import diversification efforts in 2024 as well. + +The year 2024 may prove decisive for the Kremlin’s war effort. The Russian MOD, despite facing a number of weaknesses from labor shortages to entrenched corruption in the field of military procurement, will be able to sustain domestic arms production and import diversification efforts to continue its war effort. Western, and especially U.S., support of Ukraine — now expected to be resumed shortly — will be decisive in containing Russia, as well as curtailing the possibility of a direct future confrontation with Russia. + +___`The year 2024 may prove decisive for the Kremlin’s war effort.`___ + +More precisely, Western policymakers trying to support the Ukrainian war effort should do the following: + +- __Continue supplying higher-end military equipment to Ukraine at a pace that exceeds Russia’s production rate.__ This measure should be a top priority for the West, with Western countries focusing on the production of those weapons systems that are most likely to give Kyiv a strategic advantage. According to CSIS’s Mick Ryan, “Combat lessons [from Ukraine] must pass quickly from the battlefield to [Western] manufacturers, making it easier for soldiers to influence the production of equipment and munitions.” Overall, the dynamic of Russia’s war in Ukraine will determine how much of a challenge Russia represents to the West and the international liberal order going forward. The large-scale forward movement of Russian forces in Ukraine would bring the Russian threat directly to Europe’s door, making containing Russia more urgent and difficult. Sustaining and increasing military aid supplies to Ukraine, as well as overcoming partisan disagreements on this topic, should therefore remain a priority for the U.S. establishment. + +- __Target Russia’s oil revenues. Russia’s economic adjustment has become possible due to consistently high oil revenues.__ The main way to seriously undermine Russia’s capacity to increase spending on its defense industrial sector is by targeting its oil revenues, which constitute the major income source for the government’s budget. The main economic crises the Soviet Union and Russia experienced since the 1980s were all driven by low oil prices. Western policymakers should also explore more proactive measures to push down the price of Russian oil, following in the footsteps of President Ronald Reagan’s early 1980s policy, which contributed to the economic crisis in the Soviet Union. This effort could focus on increasing oil production by countries like Saudi Arabia, decreasing purchases of Russian oil by countries like India and accelerating the clean energy transition. A recent report by the Yermak-McFaul International Working Group on Russian Sanctions outlines other measures feasible in the short term to reduce Russia’s oil revenues, including strengthening enforcement and implementing an initial downward ratchet in the price caps, as well as completing the EU embargo on Russian hydrocarbons. + +- __Close sanctions loopholes and enforce existing export controls.__ These measures could include introducing more serious penalties for sanctions violations, targeting third-country intermediaries, the “naming and shaming” of sanctions violators, and improving corporate responsibility for supply chain control. Recent examples show the moderate success of such measures. Since the United States started prosecuting tankers transporting Russia’s maritime oil shipments in violation of the oil price caps in October 2023, about half of the sanctioned tankers have failed to load cargoes since they were listed. More effective export controls would also necessitate reinforcing the Bureau of Industry and Security (BIS), using financial sanctions, and improving multilateral cooperation. Another option is to more effectively leverage U.S. financial dominance by targeting banks supporting Russia’s sanctions circumvention. Lastly, a more sensible approach to export control could prioritize selected and more easily enforceable areas, such as Western-made machine tools and components with no identifiable non-Western substitutes. + +- __Collaborate with the countries of the Global South.__ The Kremlin’s ability to sustain this war is strongly conditioned by its cooperation with third countries. Cooperating with the countries of the Global South that took neutral stances on Russia’s invasion of Ukraine helped the Kremlin undermine Western attempts to isolate Russia on the international stage, reduce its military shortfalls on the battlefield, mitigate the impact of sanctions, and shape an anti-Western axis. The West should counter the Kremlin’s efforts to build these alternative alliances by employing diplomatic tools to boost negotiations with U.S. allies and partners in the Global South. To contest Russia’s leverage in the Global South, the West should prioritize investment, development, trade, and governance rather than military intervention. This effort should also focus on limiting sanctions circumvention by countries like Turkey, the UAE, and others. + +- __Begin planning for a strengthened and empowered European defense industry.__ Russia represents a growing challenge to the North Atlantic Treaty Organization (NATO). The ongoing large-scale military reforms indicate Russia may be preparing for a confrontation with NATO within the next two decades, including a large-scale conventional war. In light of these risks, Europe must urgently boost its defense production — potentially in cooperation with Ukraine. While some important adjustments are already taking place, their speed remains too slow to deter Russia from such incursions in the future. + +--- + +__Maria Snegovaya__ is a senior fellow for Russia and Eurasia with the Europe, Russia, and Eurasia Program at the Center for Strategic and International Studies (CSIS) and a postdoctoral fellow in Georgetown University’s Walsh School of Foreign Service. + +__Max Bergmann__ is the director of the Europe, Russia, and Eurasia Program and the Stuart Center in Euro-Atlantic and Northern European Studies at CSIS. + +__Tina Dolbaia__ is a research associate with the Europe, Russia, and Eurasia Program at CSIS, where she examines and analyzes political, economic, and security developments in Russia and Eurasia. + +__Nick Fenton__ is a program manager and research associate with the Europe, Russia, and Eurasia Program at CSIS, where he supports the program’s event management, outreach, and research agenda. + +__Samuel Bendett__ is an adviser with CNA’s Strategy, Policy, Plans and Programs Division, where he is a member of the Russia Studies Program. His work involves research on Russian military technology developments; uncrewed, robotic, and autonomous military systems; and artificial intelligence. diff --git a/_collections/_hkers/2024-04-23-combating-kleptocracy.md b/_collections/_hkers/2024-04-23-combating-kleptocracy.md new file mode 100644 index 00000000..d7bacca7 --- /dev/null +++ b/_collections/_hkers/2024-04-23-combating-kleptocracy.md @@ -0,0 +1,183 @@ +--- +layout: post +title : Combating Kleptocracy +author: Tom Keatinge +date : 2024-04-23 12:00:00 +0800 +image : https://i.imgur.com/3F76e9B.png +#image_caption: "" +description: "Lessons from the Response to Russia’s War in Ukraine" +excerpt_separator: +--- + +_Two years on from the invasion of Ukraine, this paper explores the state of efforts to combat modern kleptocracy before February 2022 and assesses how the Kremlin’s war has catalysed a range of responses from Western allies._ + + + +The increased focus on countering kleptocracy following the full-scale Russian invasion of Ukraine in February 2022 has involved the deployment of dedicated sanctions programmes against Russia by Ukraine’s allies. These programmes have triggered a dramatic increase in the rate of designations of individuals and entities and have led to a greatly increased commitment of resources and activity across a range of countries. This commitment also includes an increase in legislative, regulatory and operational capacity to enhance the response to modern kleptocracy more broadly. While the fight against kleptocracy did not start here, the shock of Russia’s unprovoked aggression confronted Western leaders with the reality of their apathy over preceding decades. + +“Modern kleptocracy” refers to acts of kleptocracy occurring in the modern financial age, particularly in the past two decades, benefiting from the globalisation of finance. There is no doubt that significant energy, time and resources have been deployed, overdue legislation has been introduced, and the lower evidentiary threshold of sanctions (rather than criminal prosecution) has been used to disrupt kleptocrats connected with the Russian government. However, this paper concludes that focus must be sustained to achieve the ultimate goal of confiscating assets and dismantling the architecture that facilitates kleptocratic activity, whatever its source. + +Modern kleptocracy is not unique to Russia. Funds stolen from national exchequers across the world, funds that should be spent on health care, education and sanitation, continue to find their way into real estate and other investments in Western financial centres. Governments must ensure that their efforts do not suffer from the tunnel vision brought on by a crisis and must instead facilitate long-term internationally coordinated and concerted action to combat modern kleptocracy in all its forms. + + +### Introduction + +Calls for governments to take steps against kleptocrats are longstanding. Whether it is politicians highlighting the use of London, for example, as a playground for oligarchs and others who have amassed ill-gotten gains, or the exposure, through leaks such as the Panama Papers and the Luanda Leaks, of the enablers of illicit money movements, or dogged reporting by investigative journalists, the evidence against financial centres such as London, Panama and Cyprus has – in the eyes of most – been irrefutable. + +Yet until recently, despite these political calls and journalistic endeavours, little had been done to meaningfully address the problem. The past two decades in particular have seen the emergence of what might be termed “modern kleptocracy” – that is, kleptocrats operating with impunity, seemingly above the law and benefiting from the globalisation of finance. This persisted until Russia’s full-scale invasion of Ukraine in February 2022, which both catalysed a wide coalition of nations to take action that targeted Russia-related kleptocracy, and laid the ground for a more concerted effort against kleptocracy more broadly. + +The “unprecedentedly tough” nature of the sanctions arrayed against Russia in the aftermath of the 2022 invasion is well documented. The sanctions are aimed at restricting the funding and resourcing of the Russian military and its illegal war of aggression. But wider consideration of the lessons that might be learned from this broad-based use of sanctions, and the introduction by Ukraine’s allies of other measures to target kleptocracy, is only now beginning to emerge. Some scholars are considering how the Russia sanctions regimes might inform future sanctions use against China, should circumstances in the Indo-Pacific escalate. Others are considering how assets belonging to oligarchs might be not only frozen but seized, for the benefit of Ukraine, while others are considering how to ensure that sanctions are sufficiently targeted to avoid disrupting trade and finance that supports genuine humanitarian activity. + +This paper examines the response of Ukraine’s allies – including their use of sanctions – over the past two years in a wider perspective. The author hopes that this perspective offers those in policy circles who are currently focused on combating Russian kleptocracy ideas for how they might expand their ambitions to removing the appeal of international financial centres, not only for Russian kleptocrats, but for all those seeking to hide ill-gotten gains. + +The paper is composed of three chapters. Chapter I reviews the emerging response to kleptocracy in the years before Russia’s full-scale invasion of Ukraine. Chapter II highlights relevant elements of the sanctions regimes put in place by many of Ukraine’s allies since February 2022 to target Russian kleptocrats. Chapter III considers other mechanisms to combat kleptocracy that have emerged since Russia’s invasion. The paper concludes with recommendations for policymakers that might enable them to achieve a step change in responding to kleptocrats – and their wealth – that is long overdue. + +#### Methodology + +The research for this paper draws primarily on a review of the literature on kleptocracy that has emerged over the past decade since the issue rose to contemporary prominence, and the literature on the action related to kleptocracy and corruption taken by governments before and after the February 2022 invasion. The literature review was conducted between November 2023 and January 2024. The paper also draws on the findings of a RUSI-led project on Russia-related sanctions implementation, which has been running since June 2022. The collected data was supplemented by half a dozen virtual interviews with subject-matter experts in the US conducted between January and February 2024 to clarify issues or seek further information relating to literature published by the interviewees. A validation meeting to discuss the paper’s preliminary findings with a group of government and non-government experts took place in Washington, DC in February 2024. + + +### I. The Response to Modern Kleptocracy Before February 2022 + +Kleptocracy, defined as “a society whose leaders make themselves rich and powerful by stealing from the rest of the people”, is a longstanding and widely explored issue. It is not the place of this paper to provide a detailed analysis of the history, origin and semantics of this Greek-origin term; others have offered extensive explanations. But in the context of this paper, it is important to note that although the concept of kleptocracy is not exclusive to Russia, the collapse of the Soviet Union provided ample opportunity for the flourishing of the modern form of kleptocratic behaviour that has drawn the attention of politicians and civil society. + +Whether the context is the former Soviet Union, Africa, or other regions where high-level political power is allegedly abused for personal financial gain, the post-Cold War globalisation of finance has provided ample tools and opportunities for those seeking to profit from their positions of power to do so and create a form of kleptocracy for the modern financial age. Kleptocrats use the international financial system to hide their financial tracks and seek to use their wealth to exert influence for themselves or their political masters. The UK’s 2023 Economic Crime Plan underlines this, defining kleptocracy as: + +> [A] highly corrupted political regime where power has been consolidated for the benefit of a small elite. It is characterised by widespread theft of national wealth and resources to subvert domestic political systems. Kleptocrats exploit open financial centres and professional services in developed economies to help corrupt elites enjoy their ill-gotten gains overseas … The UK is not unique in facing this threat, but as a global financial centre and popular destination for investment we have an important role in tackling it. + +Yet, since the end of the Cold War, cities such as London have laid out the welcome mat for money – regardless of its provenance. Consider, for example, the 2011 establishment of the City of London–Moscow International Financial Centre Liaison Group, “heralding a new – and potentially lucrative – relationship between the two cities”, and the priority seems clear. + +But while the City of London, its professional service providers and real-estate agents, and those in other financial centres may have been courting this new and questionable money, politicians and policymakers have not been entirely inert. + +As far back as 2000, under the leadership of Kofi Annan, the UN was starting its journey towards creating what became the UN Convention Against Corruption (UNCAC), which came into force in December 2005. And the Sustainable Development Goals agreed by the international community a decade later included the ambition to “significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organized crime” as well as “substantially reducing corruption and bribery in all their forms”. + +Building on this, and reflecting a speech he made in Singapore in July 2015 in which he asserted that “London is not a place to stash your dodgy cash” and that “[t]here is no place for dirty money in Britain”, in May 2016 then-UK prime minister David Cameron hosted a global anti-corruption summit. And whilst the word “kleptocracy” appears nowhere in the post-conference communiqué or declaration, the conference sentiment was clear: there should be no impunity for those who steal assets, and the countries present committed to restricting these people’s ability to operate in their countries. + +With the summit coming just a month after the revelations of the Panama Papers that exposed the abuse of company registration secrecy to hide asset ownership, one key outcome was for countries to commit to “enhancing transparency over who ultimately owns and controls [companies], [in order] to expose wrongdoing and to disrupt illicit financial flows”. Progress in this regard has been slow, but, nonetheless, by highlighting this important feature of combating corruption and kleptocracy, the stage was irrevocably set for a key piece of kleptocratic architecture to be dismantled. + +While Cameron was making his case for tackling corruption and – by extension – kleptocracy, the US had already put in place operational measures to directly confront kleptocratic behaviour. In 2010, the US Department of Justice (DoJ) launched the Kleptocracy Asset Recovery Initiative “aimed at combating large-scale foreign official corruption and recovering public funds for their intended – and proper – use: for the people of our nations”. This initiative has recorded considerable success in the period since it was created. + +Alongside this law enforcement focus on kleptocracy, a number of policy developments in the US also put in place further measures for responding to kleptocracy. In 2016, FinCEN (the US financial intelligence unit, part of the US Treasury Department) issued Geographic Targeting Orders requiring certain businesses to identify the natural persons behind legal entities used in all-cash purchases of certain residential real estate in a list of US jurisdictions, a list that is continually expanding. These orders help authorities crack down on illicit financing schemes “exacerbated by a perception that real estate can be a safe way to park value and obfuscate the source of illicit funds”, and have proved valuable to a range of law enforcement agencies, although their failure to cover commercial real estate leaves an obvious gap. + +A widely acclaimed landmark achieved in the US in 2016 was the passing of the Global Magnitsky Human Rights Accountability Act. The Act authorises “the President to impose economic sanctions on, and deny entry into the United States to, foreign individuals or entities identified as engaging in human rights violations or corruption”, an authority that has subsequently been expanded via Executive Order 13818, and extensively used. Reflecting the US, one of the first steps taken by the UK to demonstrate its post-Brexit independent sanctions policy was the introduction of its own “global human rights” sanctions regime, followed in 2021 by a further regime targeting corruption with the purpose of “prevent[ing] and combat[ing] serious corruption”, including “misappropriation of property involving public officials”. + +While these regimes provide important mechanisms via which the US and the UK can signal disapproval, bar t violators from entry, and draw the attention of the private sector to targets that should be frozen out of their financial systems, such designations do not always advance efforts to confiscate the proceeds of corruption, particularly when assets are not held within the reach of the sanctioning country. Indeed, at the time of introducing the UK’s anti-corruption sanctions, then-foreign secretary Dominic Raab pointed to the lower standard of proof required to issue sanctions as compared to the criminal standard required to prosecute – a suggestion that signalling matters, even if pursuing asset confiscation for the benefit of those countries from which kleptocrats have stolen funds proves challenging. Furthermore, in the case of the UK, despite this lower standard of proof, the use of its anti-corruption regime is widely viewed as underwhelming. + +While the EU has introduced a human rights regime, it has yet to bring forward an anti-corruption sanctions tool, despite calls from the European Parliament in 2021 and the proposal of European Commission president Ursula von der Leyen in 2022 to include corruption in the EU’s human rights regime. + +The second notable event in the US during this period was the passing of the Anti-Money Laundering Act 2020; this includes the Corporate Transparency Act, which requires FinCEN to create a federal-level beneficial ownership registry, a commitment that finally went live in January 2024. Bringing increased transparency to company ownership in the US is an important further step in the dismantling of the architecture of modern kleptocracy, and starts to bring the US into better alignment with the globally required standards of the Financial Action Task Force already in place among its allies. + +Since then, the Biden administration has placed a particular focus on combating corruption, including designating the fight against corruption as a core US national security interest, targeting “the globe-trotting kleptocrat who offshores an embezzled fortune” and making extensive use of the various anti-corruption sanctions that authorities have introduced in recent years, with more than 40% of their use targeting kleptocrats. + +Alongside these US policy developments, in June 2021, a bipartisan group in the US Congress announced the creation of the Caucus against Foreign Corruption and Kleptocracy (CAFCAK) to “educate and mobilize Members of Congress on the cross-jurisdictional nature of foreign corruption and identify bipartisan opportunities to work together to curb kleptocracy”. This group has acted as a focal point for a range of kleptocracy-focused legislative successes and the anchor for wider collaboration between like-minded individuals in legislatures on either side of the Atlantic. + +Meanwhile, although lagging behind the US on the development of sanctions, the EU has made consistent advances in identifying vulnerabilities in the integrity of its financial system and responding with repeated money-laundering directives. Most recently, in 2021 – and agreed between the EU Council and the European Parliament in January 2024 – the European Commission announced its latest, and most comprehensive, response to financial crime. A wide-ranging anti-money-laundering package brought forward a number of measures that will, among other things, strengthen the EU’s response to kleptocracy when fully implemented. For example, of relevance to combating kleptocracy, entities covered by regulation will be expanded from an existing list covering financial institutions, banks, real-estate agencies, asset management services and casinos to include traders in luxury goods and high-value items such as luxury cars, aeroplanes, yachts and artworks. Certain professional football clubs and related agents will also become subject to regulation. In addition, transparency of beneficial ownership, curtailed by the European Court of Justice in November 2022, shows signs of being restored, and real-estate registers across the EU will be made more easily accessible to competent authorities. + +Lastly, and returning to UK politics, since David Cameron’s short-lived engagement with the challenge of dirty money, the UK’s political leadership has chosen to (mostly) ignore the country’s role as a central facilitator of kleptocracy – but this is not to say that Parliament has too. Of particular note has been the House of Commons Foreign Affairs Committee, which in 2018, following the poisoning of Sergei Skripal and his daughter in Salisbury, produced a scathing report that noted, despite the strong rhetoric from the government following the poisoning, that “President Putin and his allies have been able to continue ‘business as usual’ by hiding and laundering their corrupt assets in London”, and called on the government to “show stronger political leadership in ending the flow of dirty money into the UK”. This report, “Moscow’s Gold”, was supplemented by a further report from the Committee in the wake of Russia’s full-scale invasion of Ukraine, which shone a light on “The Cost of Complacency” by assessing “the consequences of the complacency of successive Governments towards illicit finance and the adequacy of the current Government’s response”, and starkly stated that: + +> London’s role as a global financial centre is tarnished by its reputation as a hub for illicit finance. The consequences for our national security and the integrity of our institutions and services are laid bare by the current war in Ukraine; assets laundered through the UK are financing President Putin’s war in Ukraine. + +In another example, the UK Parliament’s Intelligence and Security Committee, which provides parliamentary scrutiny of the intelligence and security activities of the UK intelligence community, published its Russia report in July 2020, which called, among other things, for immediate action to tackle “the illicit financial dealings of the Russian elite and the “enablers” who support this activity”. + +Such calls from parliamentarians went largely unheeded until February 2022 and Putin’s full-scale invasion of Ukraine. + + +### II. Ukraine, Russia Sanctions and Their Use Against Kleptocrats + +While the response to modern kleptocracy covers a range of legislative, regulatory and operational measures, the immediate focus of Western allies following Russia’s full-scale invasion of Ukraine was on the use of sanctions, including targeting oligarchs and others who had long been the subject of calls for action from politicians and civil society campaigners. + +The sanctions deployed by Ukraine’s allies have fallen into a number of categories. Initially, stung into action by the Kremlin’s invasion, Western countries deployed tried-and-tested financial sanctions, freezing the assets of individuals close to President Putin who, in the words of UK sanctions legislation, and consistent with that of other allies, were or had been involved in “obtaining a benefit from or supporting the Government of Russia” or in “destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine”. Allies also immobilised the assets of the Russian central bank and blocked access to the international financial markets for many of Russia’s financial institutions. In this initial phase, huge focus was placed on “the oligarchs” and their ostentatious wealth. Properties in London were frozen, yachts were seized in Mediterranean ports, and trophy assets such as football clubs were threatened with closure. + +But as the war progressed, Ukraine’s allies realised that while freezing assets might restrict the Russian economy, it was difficulty in procuring critical components – including, importantly, the micro-electronics and technology needed for its missile and drone programme – that perhaps threatened the Russian military most severely. Thus, the focus of most sanctions activity has switched to trade rather than financial restrictions, with efforts to disrupt supplies of a list of 50 goods deemed critical for Russia’s military prioritised. + +This does not mean that the focus on the oligarchs and their wealth has receded – indeed, the focus on trade has also directly impacted those oligarchs whose businesses are part of the Russian military–industrial complex. Ever since February 2022 and the first oligarch asset freezes, politicians and civil society activists have called on these assets to be not only frozen but also seized and used to benefit the Ukrainian people. In his State of the Union address in March 2022, President Biden committed to finding and seizing the “yachts” and “luxury apartments” of “the Russian oligarchs and the corrupt leaders who’ve bilked billions of dollars off this [Russian] violent regime”, concluding: “We’re coming for your ill-begotten gains.” + +Considerable time and investment have been applied to reviewing legal means by which these assets can be confiscated within the bounds of “the rule of law”. As explored further below, new requirements have been introduced in the EU, reinforcing the reporting obligation where assets have been frozen to include assets that have not yet been frozen (for example, if they have been concealed), and including a requirement to report all “funds or economic resources belonging to, owned, held or controlled by [listed persons or entities] which are located within EU jurisdiction”, setting the stage for a more muscular anti-evasion and confiscation regime. A similar requirement was also introduced in the UK at the end of 2023. Perhaps most eye-catching of all, Canada has passed legislation that expands the country’s ability to confiscate assets where “a grave breach of international peace and security has occurred, gross and systematic human rights violations have been committed in a foreign state or acts of significant corruption involving a national of a foreign state have been committed”, opening the way for more expansive (though not as yet fully tested) confiscation activity. + +While in Ukraine – a country at war – martial law has allowed for a widening of the criteria under which assets can be confiscated, to date, no solution has been found by which the Gordian knot of property rights and the rule of law can be sufficiently separated to allow for the large-scale asset confiscations called for by so many. Indeed, thus far, a mere $5.4 million, confiscated from oligarch Konstantin Malofeyev, has been transferred for the benefit of Ukraine, Malofeyev having been judged to have attempted to move money and evade sanctions. + +Nevertheless, goaded into action by Russia’s war, political leaders and policymakers have set about building new structures and passing revised laws to strengthen the resilience of the financial system against kleptocratic abuse, and designing better responses for when these defences fail. + + +### III. Widening the Lens in the Response to Modern Kleptocracy + +As this paper has shown, efforts to combat modern kleptocracy did not start with Russia’s full-scale invasion of Ukraine, and they are not restricted to the use of sanctions. But it certainly is the case that the invasion accelerated responses to cases of Russian kleptocracy and made it no longer tolerable for those allies of Ukraine that had previously hesitated on taking action – for example, passing stronger legislation – to continue to do so. The resulting action has fallen into two categories: legislative and operational developments. + +#### Legislative and Regulatory Developments + +In the months that preceded the Kremlin’s full-scale invasion, Western leaders threatened “‘massive’ economic consequences” for Russia’s economy as soon as the “first Russian toe-cap” crossed into Ukraine. While sanctions did follow, Ukraine’s allies had to scramble to ensure their national legislation met their rhetoric, having underestimated the impact of applying economic and trade restrictions on a country so closely integrated into most Western economies. Many countries rushed to pass new legislation to allow for the effective implementation of sanctions and reorganised their national sanctions architecture to reflect their close ties with Russia. For example, Lithuania was quick to redraft its sanctions law, and in May 2022 it published an updated version that put the Financial Crime Investigation Service, the country’s financial intelligence unit, at the helm of sanctions implementation. Germany had to undergo a much deeper reform by completely overhauling its national anti-money-laundering system and establishing a dedicated Office for Sanctions Enforcement after two Sanctions Enforcements Acts. Many countries have yet, two years on, to introduce the legislation necessary to criminalise the growing prevalence of sanctions evasion, and none apart from the US have seized assets from oligarchs. + +Regarding transparency, the EU suffered a significant blow at a critical time. In November 2022, the European Court of Justice ruled in favour of limiting public access to beneficial ownership registries. Some member states were quick to suspend access, whereas others, with legislation already in place to enable more universal access, maintained the registries’ operation. Recognising the damage caused by this ruling to the EU’s reputation and to efforts to identify and disrupt kleptocracy and wider financial crime activity, as noted earlier, in January 2024, the EU Council and the European Parliament agreed further steps that should once again allow members of the public with a legitimate interest, including media and civil society, to access the registries. + +In the UK, while legislation for implementing sanctions was in place, the long-overdue reforms called for by parliamentarians were quickly rushed into legislation. In March 2022, the Economic Crime (Transparency and Enforcement) Act 2022 was passed, giving effect to some key and much-needed tools for combating modern kleptocracy, including powers to accelerate sanctions decision-making (such as the introduction of an “urgent procedure” allowing the UK to fast-track designations to align with allies); strengthening the UK’s underwhelming and ineffective Unexplained Wealth Order regime; and, most importantly, establishing “a public register of beneficial owners of non-UK entities that own or buy land in the UK, operated by the Companies House registrar”. This last development paved the way for heightened transparency of property ownership in the UK, removing a widely used avenue for hiding the proceeds of modern kleptocracy. + +In late 2023, further legislation was passed, notably introducing powerful reforms to the operations of Companies House, the UK’s corporate register. Although this register has been open to public inspection for a number of years, the quality of the data it holds has repeatedly been revealed to be poor. A key component of this reform is the requirement for data held by the register to be verified, thus removing a loophole widely abused by kleptocrats. + +As noted earlier, Canada introduced legislation in May 2022 to enable the confiscation of assets in cases related to certain breaches of international peace and security. In the US, progress on implementing the Anti-Money Laundering Act 2020, including the Corporate Transparency Act, has continued, and while some striking new legislation has been introduced – such as the Foreign Extortion Prevention Act, which criminalises demand-side bribery by foreign officials – other critical anti-kleptocracy initiatives have foundered. Notably, in the face of strong opposition from lawyers’ groups, the failure of the bipartisan ENABLERS Act to secure Senate approval in December 2022 has left the US at odds with the wider international effort among its allies and partners to tackle the professional service providers that have been widely revealed to facilitate the illicit financial activities of the corrupt, kleptocrats and criminals by devising money-laundering and sanctions evasion schemes. + +Meanwhile, alongside introducing legislative changes aimed at more effectively operationalising sanctions implementation, EU countries have been bringing in new sanctions powers. In April 2022, Poland adopted its own Sanctions Act introducing a national sanctions list, and in October of that same year, Czechia approved its own Magnitsky law, joining Estonia, Lithuania and Latvia, which had already introduced their domestic versions prior to February 2022. The EU’s own directive on criminalising sanctions evasion is coming closer to introduction. + +While the legislative and regulatory armoury was being strengthened, so too was the operational response to modern kleptocracy, as countries – unilaterally and in partnership – created new entities to directly target Russian kleptocrats and their wealth. + +#### Operational Developments + +On the day of Russia’s invasion, as part of the package of response measures announced to the UK Parliament, then-prime minister Boris Johnson committed to “set[ting] up a new dedicated kleptocracy cell in the National Crime Agency (NCA) to target sanctions evasion and corrupt Russian assets hidden in the UK, and that means oligarchs in London will have nowhere to hide”. Reporting later in the year by the BBC revealed that the “K Cell” aims to “introduce friction” into the life of sanctioned oligarchs and other wealthy individuals with close ties to the Kremlin. This exclusive focus on Russia, as explored further below, draws attention to an important consideration in the fight against modern kleptocracy – the divide between the attention paid to Russian kleptocracy, and that paid to the proceeds of corruption and kleptocracy emerging from the many other affected geographies. + +As the workings of K-Cell were revealed, a new dimension in the fight against modern kleptocracy emerged – particularly for countries with overstretched and under-resourced law enforcement capabilities. Whereas the success of law enforcement responses is normally judged by prosecutions, K-Cell takes the view that “changing behaviour is seen as success as much as an appearance in court”, claiming that intelligence is revealing that people are “choosing not to invest corrupt funds in the UK as a result of [the NCA’s] work”. There is also the suggestion that “enablers like lawyers may also become nervous of the reputational damage of working with sanctioned oligarchs”, although evidence of this behavioural change has yet to be presented. + +There was a similar development on the other side of the Atlantic in March 2022, with the US authorities announcing the launch of Task Force KleptoCapture, committing to “surging federal law enforcement resources to hold accountable corrupt Russian oligarchs”. In contrast to the UK’s K Cell, the Task Force made a clear commitment to seeking arrests and prosecutions via the use of the “most cutting-edge investigative techniques … to identify sanctions evasion and related criminal misconduct”. Since its launch, the Task Force has achieved the forfeiture of $5.4 million belonging to Russian oligarch Konstantin Malofeyev, noted above, and has “obtained judgments to forfeit nearly $700 million in assets from Russian enablers and charged more than 70 individuals for violating international sanctions and export controls levied against Russia”. + +Besides the Task Force, the US 2021 Strategy on Countering Corruption rapidly took shape after February 2022. The 2022–26 Strategic Plans of the State Department, USAID and the DoJ all prioritised anti-corruption initiatives and increased their dedicated staff. In April 2022, FinCEN issued an advisory urging financial institutions to focus efforts on detecting the proceeds of foreign public corruption. + +Lastly, recognising the cross-border nature of kleptocracy, these various national initiatives are seeking to coordinate and collaborate in their efforts to “detect and disrupt the movement of ill-gotten gains, and to deny [violators] the ability to hide their assets in jurisdictions across the world”, creating the so-called “Russian Elites, Proxies, and Oligarchs” (REPO) Task Force. Working alongside the REPO Task Force, the European Commission set up the “Freeze and Seize” Task Force to ensure the effective implementation of sanctions within the EU against Russian and Belarusian oligarchs. + +More broadly, as noted by one US government official, prior to the full-scale invasion of Ukraine by Russia, cross-border collaboration on money laundering and other financial crime cases was sluggish. However, since February 2022, on cases related to sanctions evasion, there has been a marked improvement in the responsiveness and speed of requests from partner countries for information related to specifically Russian kleptocracy investigations, resulting in some notable law enforcement successes. + +In addition to developments in the public sector, the raft of sanctions imposed on Russia after February 2022 completely redrew the perimeter of sanctions implementation for the private sector. Financial institutions have significantly boosted the resources of their sanctions compliance departments to deal with the breadth of the sanctions they are required to implement. This broad scope of the sanctions regimes has also meant that many non-financial businesses across different industry sectors have been exposed to sanctions obligations for the first time, requiring them to develop sanctions knowledge, hire staff and invest in screening resources – investements that should, in relevant sectors, be harnessed to further efforts to combat modern kleptocracy. + + +### Conclusion + +This paper has sought to outline what lessons the international community has learned in its fight against modern kleptocracy from the response to two years of Russian aggression in Ukraine. + +While there has been considerable activity linked to Russia’s full-scale invasion, it is important to note that the past two years of effort have been limited in two ways. + +1. The overwhelming focus of the measures developed over the past two years is on specifically Russian kleptocracy. While some initiatives – such as those aimed at greater transparency of property and company ownership – are universal in their application, the resources invested in investigating and prosecuting modern kleptocracy are almost exclusively focused on that emanating from Russia and associated with the Kremlin’s war in Ukraine. + +2. The second limitation has to do with who is developing and enforcing these increased measures against kleptocracy. The measures are primarily restricted to those countries allied with Ukraine, and thus do not include countries that are noted facilitators of the illicit financial flows associated with modern kleptocracy, such as the UAE and Türkiye. + +The result is that the much-needed wider application of pressure against modern kleptocracy has been neglected, notwithstanding the introduction of new legislation (for example, relating to Companies House reform in the UK) and other measures (such as, in the US, the proposed broadening of regulation to cover investment advisers). A key indicator of this failure can be seen in the limited number of designations by the UK under its global anti-corruption sanctions regime in the last two years. + +The second important observation relates to outcomes. While oligarch assets have been frozen, little progress has been made on the investigations and evidence-gathering needed to secure asset confiscations, particularly in Europe, and prosecutions for sanctions evasion remain rare, despite ample evidence that evasion is occurring. + +UNCAC, a “legally binding universal anti-corruption instrument”, has formed a central pillar of global efforts to combat corruption and, by extension, the kleptocrats that abuse their connections with, or positions of, power since it entered into force in December 2005. Authorities in the US had been alive to the issue for over a decade since the Kleptocracy Asset Recovery Initiative was formed by the DoJ as part of the US’s commitment to meet its obligations under UNCAC, and parliamentarians and their equivalents on both sides of the Atlantic had been seized of the matter, even if their leaderships had not. But finance is global, and where the US led operationally, other financial centres – including, notably, given its centrality to global finance, the UK – failed to follow. + +Combating kleptocracy matters – not only, of course, for the countries from which funds are looted, but also for the national security of those countries to which the proceeds of kleptocracy flow. As the 2023 updated UK Economic Crime Plan notes, illicit finance linked to corrupt elites from Russia and other kleptocratic jurisdictions and hostile states undermines a nation’s reputation and enables broader national security threats such as the subversion of democratic processes and institutions. + +Since Putin’s full-scale invasion of Ukraine, political leaders have been shamed into action, passing long-overdue legislation and creating task forces and other initiatives in an attempt to make up for lost time. Whether they will succeed remains to be seen, but kleptocracy is not unique to Russia. Funds stolen from national exchequers across the world, funds that should be spent on health care, education and sanitation, continue to find their way into real-estate and other investments in Western financial centres. We should certainly strive to identify and confiscate ill-gotten gains from those that have supported and benefited from the patronage of President Putin, but so too must we ensure that the tools and mechanisms that have facilitated their financial dealings are no longer available to kleptocrats and the corrupt from elsewhere across the globe. + +In its 2023 Serious and Organised Crime Strategy, the UK government commits to “combat[ing] kleptocracy by improving financial sanctions design and implementing, enforcing and strengthening our response to kleptocracy”. But what does this mean in practice? And how can the legislative, regulatory and operational steps taken over the past two years and reviewed in this paper – born of a desire to address more than a decade of neglect – be solidified to ensure that the ability of kleptocrats to abuse Western financial services and investment markets can be curtailed once and for all? + +This paper proposes the following actions for accelerating the fight against modern kleptocracy, based on the steps taken over the last two years, motivated by two years of Russian aggression in Ukraine. + +- __Sustain focus:__ Russia’s full-scale invasion of Ukraine triggered a strong response from Western allies related to specifically Russian modern kleptocracy, yet history shows that new crises (such as the Hamas terrorist attack on Israel and subsequent Israeli response) can quickly distract policymakers and divert law enforcement resources. + +- __Avoid tunnel vision:__ While considerable resources have been dedicated to targeting specifically Russian kleptocracy via sanctions, reforms with broader application have been introduced. These must be leveraged to ensure that modern kleptocracy writ large is addressed and that efforts are not confined to Russia. + +- __Promote international cooperation:__ International cooperation to combat modern kleptocracy has strengthened since February 2022. Initiatives established since the full-scale invasion must be formalised and expanded to respond to kleptocracy in all its forms, and not confined to Russia sanctions-related activity. + +- __Enhance operational capacity:__ While some new resources have been introduced in Europe, capacity to respond to modern kleptocracy remains short of what is required to create a sustained and effective response. + +- __Strengthen legislation:__ Countries have discovered that freezing kleptocrat assets is the easy part. Stronger legislation is required to support the investigation of modern kleptocracy, and thus ensure that assets are not only frozen but also confiscated and returned to their rightful beneficiaries. + +- __Dismantle the enabling architecture:__ Too much of the architecture that can be abused by kleptocrats (including corporate secrecy and professional enablers) is allowed to persist. Efforts to dismantle this architecture must be accelerated, and valuable legislative initiatives, such as the US ENABLERS Act, must not be allowed to fail. + +- __Take responsibility:__ International financial centres must acknowledge that they fuel kleptocracy by offering the tools and expertise necessary to move and hide stolen funds. Thus, those responsible must work harder to use newly acquired legislative, regulatory and operational tools to remove the loopholes and vulnerabilities abused by kleptocrats. This includes the necessity of following through on enforcement via prosecutions and asset confiscations, rather than imposing sanctions as a sole solution. + +- __Support democratic resilience:__ The fight against modern kleptocracy is a whole-of-society effort. All of society must be empowered in this fight. + +In sum, Russia’s full-scale invasion of Ukraine has energised governments in their efforts to combat modern kleptocracy. Steps taken over the past two years have paved the way for greater success, but the focus must be sustained, broadened beyond Russian modern kleptocracy, and made permanent if these efforts are to bear fruit. + +--- + +__Tom Keatinge__ is the Director of the Centre for Finance and Security at RUSI. diff --git a/_collections/_hkers/2024-04-24-australias-deterrence-rules.md b/_collections/_hkers/2024-04-24-australias-deterrence-rules.md new file mode 100644 index 00000000..4d06966e --- /dev/null +++ b/_collections/_hkers/2024-04-24-australias-deterrence-rules.md @@ -0,0 +1,63 @@ +--- +layout: post +title : Australia’s Deterrence Rules +author: Peter Layton +date : 2024-04-24 12:00:00 +0800 +image : https://i.imgur.com/Xr2vy1E.jpeg +#image_caption: "" +description: "Australia’s First National Defence Strategy: Deterrence Rules" +excerpt_separator: +--- + +_With its first-ever National Defence Strategy, Australia aims to respond to a rapidly shifting strategic environment. But can the strategy address some of Australian defence’s more endemic problems?_ + + + +The Australian government has just released the country’s first National Defence Strategy (NDS), together with its accompanying Integrated Investment Plan (IIP). Australian governments often last three terms, so these two documents are likely to remain relevant into the next decade, albeit with biennial review. + +The NDS is effectively a rebadged Defence White Paper, a long-used technique by which Australian governments have controlled the sprawling and big-spending Department of Defence. The difference is that the NDS is considered more expansive in that it looks beyond the Department to take a whole-of-government and whole-of-nation approach that connects all instruments of national power. The Department is now seen as one element contributing to the nation’s defence, rather than being responsible for its entirety. + + +### A Strategy for Worrying Times + +The NDS argues that Australia’s strategic environment is continuing to deteriorate given increasing strategic competition between the US and China, major wars in Europe and the Middle East, a large Chinese arms build-up, and ongoing tensions over Taiwan and in the South China Sea. The solution is seen as a strategy of denial that prevents others projecting power against Australia from the seas to the north. Earlier defence white papers have made similar arguments; however, this latest incarnation has some new twists. + +The denial strategy’s contemporary implementation now “re-weights” the 2020 Strategic Update’s equal weighting assigned to the defence objectives of shaping, deterring and responding. Deterrence is now Australia’s primary strategic defence objective, with the others supporting this. Another change is the priority now attached to the Australian Defence Force (ADF) needing “the capacity to protect Australia’s economic connection to our region and the world”. + +The IIP sets out how the NDS’s objectives will be met in terms of new equipment acquisitions for the ADF. Over the next 10 years, some A$330 billion will be spent, with the largest single-project budgetary outlays by far consisting of the nuclear attack submarines acquisition (estimated to cost A$53 billion to $A63 billion) and the building of six Hunter-class frigates (A$22 billion-A$32 billion). + +___`The solution to Australia’s deteriorating strategic environment is seen as a strategy of denial that prevents others projecting power against Australia from the seas to the north`___ + +This expenditure reflects the maritime focus of the denial strategy, but the next tier of megaprojects instead look to enhance ADF preparedness. These feature acquiring stocks of naval strike and air defence missiles such as Tomahawk, SM‑6 and Naval Strike Missiles ($12 billion-$15 billion); improving the ability to build guided weapons in Australia (A$16 billion-A$21 billion); and establishing additional logistics centres and capacity (A$10 billion-A$15 billion). + +Below this A$10 billion-plus tier, there are many smaller projects aimed at continuing to modernise the ADF. Of these, two less typical projects are the army receiving 26 landing craft to allow manoeuvre in the littoral in a manner akin to the US Marine Corps Expeditionary Advanced Base Operations concept, and the air force planning to fit hypersonic missiles on its F/A-18F Super Hornet fleet. + + +### Tactical or Strategic? + +Unsurprisingly, the NDS is a considerably more comprehensive and sophisticated document than last year’s Defence Strategic Review, which simply reflected a few consultants’ personal opinions and not the considered judgment of the Defence Department. Even so, the NDS is stronger at the tactical level than the strategic. It rather nicely sets out six capability effects (pp. 28–29) which are the broad requirements into which new and old equipment should fit. There is, though, no clear connection between this more tactical level and the primary strategic objective of deterrence; the linkage is assumed, not explained. + +This is odd. Over the last two years, the foreign and defence minister have given numerous well-coordinated speeches and media statements to set out and explain Australia’s two grand strategies: a balance-of-power one addressing great power competition, and an engagement grand strategy focused on the region’s middle and small powers. The NDS occasionally alludes to the former while ignoring the latter, but both deeply involve and shape Defence. + +This may be a result of the use of scenarios to devise the NDS’s investment priorities, explained in detail in the IIP. Scenarios are well-suited for technical analysis of force-on-force interactions, and so their use here might have unintentionally pushed Defence towards exploring tactical-level issues instead of addressing strategic matters. Higher-level wargaming might now be useful to enhance today’s strategic debates and the anticipated 2026 revision of the NDS. + + +### Bouquets and Brickbats + +Given the NDS’s goal of taking a national approach, the document attempts early on to integrate defence activities with the wider Australia. The NDS is considered as both working with and making investments useful to statecraft, national resilience, industrial resilience, supply chain resilience, innovation, science and technology, the national workforce and skills base, and the national intelligence community. + +___`While the Strategy is pleasantly open in noting a shortfall of some 4,400 ADF personnel, only marginal attempts appear to be being made to solve this`___ + +This broad national approach is most evident in the many discussions across the NDS and the IIP on the naval shipbuilding and sustainment enterprise. Indeed, the AUKUS Pillar 1 nuclear submarine project can sometimes appear more a nation-building than a defence-related programme. The NDS also fits well with the prime minister’s new push for increasing manufacturing in Australia under the rubric of “A future made in Australia”. + +On the other hand, the two criticisms continually made of Australian defence since 2020 remain. + +Firstly, while the NDS is pleasantly open in noting a shortfall of some 4,400 ADF personnel – some 10% of the workforce – only marginal attempts appear to be being made to solve this. New equipment is being bought that will lack a workforce to operate it. + +Secondly, to justify increasing defence spending, both the current and previous governments have argued for urgency in making the ADF battle-ready. However, the actions taken seem out of step with this rhetoric. Only two weeks before releasing these documents, the defence minister quietly signalled that short-term improvements to the ADF are now considered less pressing. He asserted that commentators focusing on this produced “analysis [that] lacks wit…. Australia’s challenge lies in the future beyond this. And here we must invest in the next-generation capabilities the ADF needs”. + +In the main, the NDS and the IIP look to early next decade. The ADF of this decade will remain much as it is now. + +--- + +__Peter Layton__ has a doctorate from the University of New South Wales on grand strategy, has lectured on the topic in the US, UK and Australia, and has undertaken a Fellowship at the European University Institute. His research interests include grand strategy, national security policies particularly relating to middle powers, defence force structure concepts and the impacts of emerging technology. diff --git a/_collections/_hkers/2024-05-07-disable-the-enablers.md b/_collections/_hkers/2024-05-07-disable-the-enablers.md new file mode 100644 index 00000000..9bbc4c59 --- /dev/null +++ b/_collections/_hkers/2024-05-07-disable-the-enablers.md @@ -0,0 +1,111 @@ +--- +layout: post +title : Disable The Enablers +author: Justyna Gudzowska, et al. +date : 2024-05-07 12:00:00 +0800 +image : https://i.imgur.com/0ChsvCW.jpeg +#image_caption: "" +description: "Disabling the Enablers of Sanctions Circumvention" +excerpt_separator: +--- + +_This Policy Brief identifies common mechanisms by which professional service providers facilitate sanctions evasion and makes recommendations for how policymakers can work together to minimise the use of professional service providers to circumvent sanctions._ + + + +### Introduction + +Following Russia’s full-scale invasion of Ukraine in February 2022, an international coalition of Ukraine’s allies deployed a wide range of sanctions as a core pillar of its response. These sanctions regimes have focused on efforts to restrict the funding and resourcing of the Russian military. However, President Vladimir Putin’s kleptocratic government also relies on an inner circle, which has been rewarded for its loyalty with tremendous wealth. These individuals have also been targeted by sanctions, with bank accounts and trophy assets, such as yachts, being frozen. In anticipation of being sanctioned – or subsequent to designation – these individuals have sought out professional services to construct complex mechanisms for hiding their assets and avoiding the full impact of the sanctions. + +A critical element of the response to this evasion activity is the work of investigative journalists, including those of the Organized Crime and Corruption Reporting Project (OCCRP), which has uncovered information – such as that revealed in the “Rotenberg Files” and “Cyprus Confidential” project – about how these entities and individuals respond, and about the circumvention services they employ. + +While policymakers have been focused on designing and issuing sanctions packages, historically less focus has been placed on tackling evasion activity, particularly in Europe. Analysing the reporting by OCCRP and others can provide insights into the tactics employed by those seeking to evade sanctions and thus can offer valuable guidance on how to respond in the Russia context and beyond. As this Policy Brief reveals, one critical response to the widespread problem of sanctions circumvention is to disable the professional “enablers” of such circumvention. + +This brief analyses a sample of over 100 relevant recent investigative reports, by OCCRP and other media outlets, on Russian and Belarusian individuals and entities who have been aided by professional service providers in their attempts to circumvent sanctions; as well as official US, UK and EU actions taken against professional enablers and their services since the full-scale invasion of Ukraine in February 2022. Using this evidence base, and with an audience of policymakers in mind, this brief identifies common mechanisms by which professional service providers facilitate sanctions evasion and makes recommendations as to how policymakers can work together to minimise the use of professional service providers to circumvent sanctions. + + +### The Enablers + +With Russia’s war in Ukraine entering its third year, and with no military resolution appearing imminent, sanctions – and their effective implementation – will remain a key part of the response to this illegal and unprovoked aggression. At the same time, those targeted by sanctions will inevitably attempt to thwart their impact by exploiting loopholes. Targeting the enablers of this evasion activity will be a critical front in ensuring sanctions are as effective as possible. + +The “enablers” are professionals who often hide behind a veil of white-collar respectability while providing their clients with services to help them hide, move and invest illicit wealth. These services are frequently provided by lawyers, trust and company formation agents, investment advisers, money managers, real-estate professionals, art and antiquities dealers, and accountants. They can also, as described below, be “one-stop-shop” consultants. The involvement of these enablers falls across a spectrum: at one end sits wilful blindness (for example, choosing not to identify the ultimate beneficiary of opaque financial transactions); and at the other are those that offer active collusion (deliberately hiding and moving assets for Russian oligarchs) by exploiting jurisdictions with lax regulatory oversight and using networks of agents across offshore financial centres. + +However, it would be a mistake to focus too much on the type of profession because, as this Policy Brief demonstrates, in practice many enablers from different professional backgrounds perform the same types of services for their clients, such as shell company formation, to take one example. + +Enablers also vary in their level of sophistication. For instance, certain service providers in what is often called the “wealth defence industry” not only create the front-end financial vehicles and offer the asset and legal services necessary to obscure their client’s wealth, but also provide the critical back-end services to contest and attack regulators and the media. + +Although the primary focus of this brief is non-bank enablers, which have in the past escaped the kind of regulatory oversight and enforcement that traditional financial institutions have been subjected to, it is critical to acknowledge that banks and elite lenders continue to manage money for clients who are at risk of being sanctioned. + + +### The Services + +As a result of the wide range of services provided by the enablers identified through OCCRP and other investigative reporting, as well as the relevant literature, this Policy Brief interprets the term broadly and has identified the following typologies of activity. + +#### Hiding Wealth + +1. __Playing the shell game:__ Oligarch ownership is obscured through convoluted corporate structuring that uses shell companies, trusts, nominee directors and the shifting of assets to offshore jurisdictions, including via cryptocurrencies, loan forgiveness schemes, convertible promissory notes and the use of opaque investment vehicles. One example of this behaviour was exposed by the recent Cyprus Confidential investigation, which revealed that Russian oligarch Roman Abramovich held an estimated $2 billion in assets and cash across Credit Suisse, UBS and Barclays. Abramovich’s ownership of blue-chip US stocks, which were used as collateral for bank loans, had been obscured via offshore companies, trusts and complex corporate structures arranged by the Cypriot corporate service provider, MeritServus. In another example from June 2022, the US Treasury Department blocked a Delaware trust holding over $1 billion in assets linked to oligarch Suleiman Kerimov. Although the trust was formed in 2017 and Kerimov was sanctioned in 2018, it took four years for the trust to be identified as blocked. According to the US Treasury’s press release, “Kerimov used a complex series of legal structures and front persons to obscure his interest in [the trust]”. The trust funds were in turn invested in large US companies and “managed by a series of U.S. investment firms and facilitators”. + +2. __Keeping it in the family:__ To avoid detection, enablers often register companies, assets and trusts in the names of relatives or trusted proxies of their clients, as well as using relatives or associates as directors. Investigative reporting has revealed this to be a common typology, with examples including: Russian oligarch Alisher Usmanov’s sister, a gynaecologist, listed as the beneficial owner of 27 Swiss bank accounts; Boris Rotenberg’s bodyguard and Arkady Rotenberg’s girlfriend holding valuable assets; and Alexander Mashenski restructuring ownership of his Belarusian fishing business to benefit his daughter, two months after the invasion of Ukraine. Another high-profile proxy that was exposed through investigative journalism is Eric Whyte, a Canadian and Cypriot citizen, who appears to have no business activities outside the network of offshore companies he allegedly controls – offshore companies connected to assets worth approximately $130 million. OCCRP reporting suggests that the beneficial owner of Whyte’s empire is actually Andrei Kostin, a sanctioned Russian banker with strong ties to Putin. + +3. __Leveraging networks:__ Enablers employ connections to other money-laundering networks or organised crime. Although they attempt to maintain a veneer of respectability, some enablers are not above working with professional money launderers and criminals. In a sweeping action against sanctions evasion, the US Treasury Department sanctioned Georgios Georgiou for his role in laundering money for “criminal organizations, corrupt businessmen and Russian oligarchs” by using a variety of creative schemes to obscure the beneficial ownership of funds. In its press release, the Treasury noted Georgiou’s provision of services to another sanctioned enabler and founder of a “private equity and corporate structuring entity heavily involved in moving Russian finance into the UAE and money laundering”. + +#### Maintaining Control + +1. __Pass the parcel of assets:__ Once the source of funds is obscured through shell companies, trusts and investment vehicles, they are invested by the professional enabler (either the same enabler who created the vehicle or a more specialised facilitator such as a real-estate professional). The funds are channelled into desirable assets including shares, real estate, artwork, yachts, jets and other luxury goods, such as precious metals and stones. OCCRP’s investigation into the Russian oligarch brothers Boris and Arkady Rotenberg, “The Rotenberg Files”, has revealed complex investment vehicles, corporate restructures, asset transfers and property schemes involving numerous proxies and permissive jurisdictions, such as the British Virgin Islands and Cyprus, all coordinated by a network of international professional service providers and designed to preserve the brothers’ financial empire and maintain their control over real estate, yachts and companies. + +2. __Owning 49%:__ Diluting ownership stakes to avoid certain thresholds, such as those that trigger share reporting or financial sanctions, allows the effective control of assets by oligarchs to remain undetected or outside the requirement to freeze those assets. This tactic is often used by enablers in combination with other sanctions-evasion typologies, such as “keeping it in the family”, “pass the parcel of assets”, or “playing the shell game”, to maintain hidden ownership or control. For example, OCCRP investigative reporting in 2022 revealed how, at that time, Usmanov maintained a 49% stake in his main business conglomerate, while the remainder was held by a range of opaque offshore companies and business associates. + +#### Thinking Globally + +1. __Shopping around:__ Jurisdiction shopping to take advantage of a lack of sanctions, a delay in sanctions or lax regulatory oversight is one of the most common tactics used by enablers to avoid these measures. OCCRP’s “Russian Asset Tracker” reveals a profusion of oligarch mansions, yachts and planes located in offshore financial centres, such as Bermuda, the Cayman Islands, Cyprus, Dubai, Luxembourg, Switzerland, the British Virgin Islands and the Isle of Man. Moreover, recent investigative reporting into large leaks of financial documents, such as the FinCEN files, Panama Papers and Suisse Secrets reports, all bear the classic hallmark of oligarchs using offshore entities to hide their international assets. The Rotenberg Files further reveal how mismatches between the US, EU and UK sanctions against the brothers and their family members allowed them to exploit those differences. While both brothers were sanctioned by the US in 2014, the UK and the EU did not sanction both until years later. For cunning and well-resourced oligarchs, that sort of time lag is a major window of opportunity. + +2. __Passport to financial freedom:__ Enablers often take advantage of the multiple passports of their clients and their clients’ family members to unlock access to favourable jurisdictions. Investigative reporting has identified the Finnish citizenship of Boris Rotenberg and the US citizenship of his wife. Abramovich is a citizen of Israel and Portugal, in addition to Russia. Members of the powerful Vorobyev family are citizens of Israel, Latvia, Singapore and Monaco. If their clients do not already possess useful passports, enablers also facilitate the purchase of citizenship in a preferred jurisdiction. As OCCRP reported in February 2023, five of the 10 people sanctioned by the US for operating a Russian arms sanctions-evasion network acquired EU citizenship through Cyprus’s notorious “golden passport” scheme. + +#### Deflecting Scrutiny + +1. __On the front foot:__ Many enablers offer a one-stop shop, not only constructing the vehicles necessary to shield their clients’ assets from international scrutiny; but also negotiating or aggressively dealing with regulators, compliance officials and journalists who take an interest in their clients’ affairs. An OCCRP report into data leaked from the boutique Swiss investment firm Finaport Holding shows a client list that included dozens of politically exposed persons, among them Russian oligarchs. Correspondence published by OCCRP demonstrates how Finaport employees actively circumvented compliance procedures and forcefully pushed back against due diligence requests from banks, dismissing concerns and threatening to remove their clients’ accounts. + +2. __Spin and suits:__ In addition to playing defence, some enablers play offence by deploying global public relations strategies and international lawfare against governments, regulators and the media. For instance, in October 2022 The Intercept reported that Yevgeny Prigozhin, then-leader of the mercenary Wagner Group, had recruited UK and US legal firms to challenge international sanctions against him and to sue journalists who had investigated his business dealings. The detrimental impact of such strategic lawsuits against public participation (SLAPPs) is immense, with OCCRP revealing in 2023 that journalists and media outlets in its global network were battling over 60 lawsuits filed by the subjects of their investigations. + +#### Being Prepared + +1. __Staying one step ahead:__ With all risk-management strategies, the best outcome is to avoid exposure entirely. Thus, the most accomplished professional service providers engage in all typologies of sanctions-avoidance activity before their client is even sanctioned. For example, OCCRP and the International Consortium of Investigative Journalists investigative reporting has revealed that, in the days after the invasion of Ukraine, PwC Cyprus facilitated the transfer of millions of dollars between anonymous shell companies on behalf of as yet non-sanctioned Russian oligarch clients. Similarly, shortly before sanctions were imposed on Roman Abramovich, leaked files demonstrate that trusts holding billions of dollars in assets were amended to transfer beneficial ownership to his seven children. + + +### Conclusion and Recommendations + +As illustrated by the reporting and analysis presented in this brief, fundamental policy and practice gaps continue to allow enablers to help their clients improperly protect their assets and interests from sanctions. To address the range of activities highlighted above, policymakers should take the following steps, which will also strengthen sanctions implementation beyond the Russia context: + +1. __Establish deterrence:__ Enforcement actions against professional enabler networks that violate existing laws and designations against those that operate in lax jurisdictions must be increased. The EU and the UK lag the US when it comes to designations of, and criminal and civil enforcement against, professional enablers. The chilling effect of US and UK designations against Cypriot enablers in April 2023 should be replicated, while more criminal prosecutions should be brought against those who continue to break the law, following the example of the US Department of Justice’s Task Force KleptoCapture, and greater use should be made of the multinational REPO Taskforce. Currently, being a professional enabler in the UK and the EU is low cost and high reward, with few to no consequences. This is critical as professional enablers serve as nodes for sanctions evasion and can cater to multiple sanctioned clients. + +2. __Enhance coordination:__ Better coordination of sanctions designations across likeminded jurisdictions is required to improve compliance. Although significant strides have been made in multilateral coordination between the US, the UK and the EU, and other likeminded jurisdictions, significant differences in sanctions designations remain, as shown by the Atlantic Council’s Russia Sanctions Database. At the same time, this brief demonstrates that jurisdictional arbitrage is one of the most popular methods for avoiding the bite of sanctions, and that lags in the imposition of sanctions provide legal cover to enablers taking advantage of differences in timing to move and hide oligarch assets. + +3. __Take a “network” approach:__ Sanctions must be imposed on an oligarch’s entire network simultaneously to minimise opportunities to shift assets to family members and associates. Any delay facilitates evasion. The use of family members, such as children, romantic partners, and even low-level associates, like bodyguards or school friends, continues to be a top sanctions-evasion and -avoidance method. Abramovich’s transfers to his children are a case in point. While it is standard in US sanctions programmes to include spouses and adult children, the EU only expanded its sanctions programme to cover immediate family members in mid-2023. But loopholes – such as the use of minors who are unlikely to be sanctioned for legal and policy reasons – persist and should be addressed by, for example, blocking assets that have been transferred to them in an apparent effort to avoid sanctions. + +4. __Publicise blocked property:__ A lack of information about ownership impedes effective private sector implementation. To enhance private sector enforcement, allies should consistently and publicly identify any property, such as real estate, yachts and artwork, or legal arrangements, such as trusts, in which the sanctioned person has an interest. As described above, particular attention should be paid to any assets that may have been transferred to family members and associates to shield them from sanctions. + +5. __Harmonise ownership and control sanctions rules:__ Harmonisation of the sanctions rules on 50% ownership and control across the US, the UK and the EU is required to enhance multilateral sanctions enforcement. Additionally, the US should expand its “50% rule” to encompass a control standard as lowering ownership of entities to just below the 50% threshold while maintaining control through proxies continues to be a favoured tactic used by oligarchs and their enablers. + +6. __Close regulatory loopholes:__ Loopholes in the regulation and supervision of professional enablers facilitate sanctions circumvention and evasion. The US, in particular, needs to pass legislation or in certain cases finalise proposed rules imposing anti-money-laundering obligations on those who provide certain financial or related services, including those who incorporate or register companies, form trusts, manage money or other assets, are involved in real-estate closings and settlements, advise on investments, or are engaged in the trade or sale of works of art or antiquities. Those who fail to comply should face more actively applied civil and/or criminal penalties and, as appropriate, the suspension or revocation of licences, along with other disciplinary actions. The UK and the EU should focus on making their existing supervisory regimes more effective and on following through with enforcement to act as a genuine deterrent. + +7. __Focus on services:__ As enablers do not adhere to neatly defined professional roles, neither should efforts to regulate them. To avoid inadvertently creating loopholes, legislation and regulations should follow the example of the proposed US ENABLERS Act by focusing on the services provided by enablers across various professions, such as setting up companies and trusts, serving as nominee directors and managing assets. + +8. __Pressure enabling jurisdictions:__ The ability of certain jurisdictions to continue to offer sanctions-evasion services must be addressed. Pressure on enabler jurisdictions, such as Cyprus, the British Virgin Islands, the UAE and Türkiye must be increased to restrict evasion opportunities by designing clearer consequences for their actions. If such efforts are unsuccessful, allies must issue advisories on specific “enabler jurisdictions”, laying out the risks of doing business with them and should consider creating a designation category of “jurisdiction of primary sanctions evasion concern”. + +9. __Enhance scrutiny of visa and citizenship schemes:__ Further progress must be made in addressing the abuse of “golden passports/visas” (or citizenship/residency) by investment schemes which are easily exploited by oligarchs and their enablers to shield themselves and their assets. Numerous oligarchs and enablers are reported to have benefited from these types of schemes. More broadly, visa bans should be used more frequently – and the listings publicised and coordinated between allies – to enhance travel restrictions on those who, whether or not in violation of local law, enable sanctions evasion and to highlight those enablers who represent a sanctions-evasion risk. + +10. __Develop more inclusive information sharing mechanisms:__ Investigative journalists and civil society have committed significant resources to revealing sanctions-evasion vulnerabilities and activities. Governments should systematically leverage this capacity by sharing unclassified information with accredited journalism organisations, civil society and the private sector to enhance investigations and compliance. They should also expand or create dedicated liaison and reporting channels for two-way information exchange that shield groups submitting information from legal or other threats. + +11. __Get serious about tackling SLAPP suits:__ The UK and the EU need to build on recent progress by ensuring that the UK’s anti-SLAPP bill is sufficiently broad and the EU’s anti-SLAPP directive is implemented properly by member states. Effective anti-SLAPP laws are essential to ensuring that the “wealth defence industry” is not able to suppress investigative reporting by journalists and civil society that exposes kleptocrats and their enablers. + +12. __Continue to boost beneficial ownership and control transparency:__ Publicly accessible, central and verified beneficial ownership registries that encompass the full gamut of legal entities and arrangements are indispensable to combating sanctions evasion. Key global centres, such as the British Virgin Islands, must be provided with the analytical resources they need, and journalists and civil society actors must be granted access to such registries to allow them to leverage the information in their investigations, thus serving as a resource for overextended governments. Governments too must upskill law enforcement and other investigative authorities on how to make use of beneficial ownership information. + +As Russia’s illegal war in Ukraine grinds into its third year and the range of sanctions targets dwindles, curtailing evasion activities must be a heightened focus for Ukraine’s allies. As this Policy Brief has shown, central to this mission should be an active campaign to disable the enablers which have been revealed by investigative journalists to be, knowingly or unknowingly, facilitating evasion by exploiting loopholes and using a range of obfuscation tactics. + +--- + +__Justyna Gudzowska__ has spent her career at the intersection of financial crime and international security. She is an international expert on sanctions, corruption, terrorism financing, and money laundering, having worked on these issues across the public and private sectors. She teaches a class on illicit finance at Georgetown University’s School of Foreign Service and is the founder of Firefly Advisory LLC, an anti-financial crime strategic advisory firm. Justyna is also a Senior Advisor to The Sentry, an investigative and policy organisation that seeks to disable multinational predatory networks that benefit from violent conflict, repression, and kleptocracy. + +__Eliza Lockhart__ is a Research Fellow at the Centre for Finance and Security at RUSI. Her research examines matters at the intersection of law, finance, and global security; with a particular focus on how evidence-based policy can promote democratic resilience and protect the rule of law against foreign interference. Eliza’s current projects include whistleblowing, state threats and economic security. + +__Tom Keatinge__ is the founding Director of the Centre for Finance and Security (CFS) at RUSI, where his research focuses on matters at the intersection of finance and security. He is also currently a specialist adviser on illicit finance to the UK Parliament’s Foreign Affairs Committee ongoing enquiry. diff --git a/_collections/_hkers/2024-05-08-russia-and-china-in-arctic.md b/_collections/_hkers/2024-05-08-russia-and-china-in-arctic.md new file mode 100644 index 00000000..273d5a3e --- /dev/null +++ b/_collections/_hkers/2024-05-08-russia-and-china-in-arctic.md @@ -0,0 +1,66 @@ +--- +layout: post +title : Russia And China In Arctic +author: Elizabeth Buchanan +date : 2024-05-08 12:00:00 +0800 +image : https://i.imgur.com/UKIbmu8.jpeg +#image_caption: "" +description: "Why Russia and China Won’t Go the Distance in the High North" +excerpt_separator: +--- + +_Despite some common interests, Russia and China have different goals in the Arctic._ + + + +Closer engagement between Russia and China has fuelled assumptions of an emerging axis. The Arctic is often cited as evidence of Sino-Russian alignment due to their growing Arctic ties across the security, strategic and commercial spheres. Beijing frames its Arctic relationship with Russia often in terms of “win-win” agreements and strategies. This term, “win-win”, reflects Beijing’s Confucius thinking, and indicates that the two countries’ bilateral mutually beneficial interests in the region remain far short of the increasingly popular assumption of a brewing Arctic alliance. + +Resources and transportation (that is, the future history of global maritime trade) are the two primary strategic interests driving China’s Arctic gambit. All components of the Arctic resource “prize” are of interest to Beijing and feature across various policy statements and indeed within China’s 2018 Arctic Strategy. As a burgeoning global trade power, the ability to cut logistics costs and, indeed, transportation times, is of central interest to China. Here, the Northern Sea Route (NSR) – largely hugging the Russian Arctic coastline – links Asia to Europe. Through the Arctic Ocean, the Atlantic and Pacific Oceans are connected. Travel time between Asia and Europe via the NSR is about 23 days on average, compared with the Suez Canal’s 37-day average. In 2013, the first Chinese merchant ship transited the NSR and was the first container vessel ever to do so. + +China’s Arctic interest dates to 1925, when it acceded to the Spitsbergen (now Svalbard) Treaty. The treaty benefited the signatories economically by facilitating access to mining rights on the Svalbard archipelago, while agreeing to protect Svalbard from any military buildup. This Arctic archipelago’s scientific and research value was further tapped by China in 2004 when Beijing built the Yellow River Arctic research station – cementing Chinese presence in the region. + +In addition, the Xue Long (Snow Dragon), China’s first icebreaker, has conducted numerous Arctic research expeditions since 1999. Today, it is joined by Xue Long-2, China’s first indigenously built icebreaker. Murmurs of a nuclear-powered icebreaker about to roll off China’s production yard further point to Beijing’s growing polar capability. In securing observer status to the Arctic Council in 2013, China inserted itself into the Arctic governance ecosystem. But this does not place Beijing at the decision-making table – observers do not vote or lead multilateral discussion within the Arctic Council. + +Beyond transportation, Beijing seeks to diversify its energy imports across the globe. This makes the resource-rich Russian Arctic Zone (both inland and offshore) an attractive component of China’s diversification strategy. While the Sino-Russian Arctic relationship is predicated on economic foundations, for now, Russia has yet to fall into Beijing’s “debt-trap diplomacy”. Moscow maintains stringent domestic legislation on joint ventures and ownership of sovereign energy deposits. This is a delicate balance. Russia relies on sustained future Chinese demand for Arctic liquified natural gas (LNG), but Moscow has also worked to diversify its capital pools. India, Japan, Saudi Arabia and South Korea are all linked to Russian Arctic energy ventures in one way or another. + +China does not have a majority share in either of the two key LNG projects on the Russian Arctic’s Yamal Peninsula. Beijing’s share in the Yamal LNG venture is 29.9%, while Russia’s Novatek holds a controlling 50.1% and France’s Total holds 20%. In the Arctic-2 LNG project, China holds 20%, Novatek 60%, Total 10%, and the remaining 10% is held by a Japanese consortium. Russia’s upcoming Arctic energy projects, located in proximity to the existing Yamal Peninsula ventures Ob (LNG), Vostok (oil), Arctic-1 (LNG) and Arctic-3 (LNG), can be expected to attract diverse capital pools. + +Likewise, on the NSR or “polar silk road” front, Russia maintains the upper (controlling) hand. The NSR wraps along the Russian coastline for most of its route. This is important to Russia for two reasons. First, much of the NSR falls within Russia’s exclusive economic zone (EEZ) and therefore Moscow has deemed it necessary to charge transit tariffs. The tariffs have been accompanied by Russia’s introduction of tight rules and domestic laws for foreign firms looking to use the route. Second, Russia insists vessels can only navigate the NSR when accompanied by Russian nuclear icebreakers. Tapping into NSR potential is thus subject to strict Russian directives. + +___`The notion that there is a Sino-Russian Arctic alliance is a misinterpretation of the realities that drive China and Russia together in the Arctic`___ + +While mutually beneficial interests – and the overall sense of “win-win” agreements – facilitate close engagement between Beijing and Moscow in the Arctic, it is still problematic to assume an Arctic “axis” is forthcoming. China’s efforts to increase its engagement in the Arctic are occurring far beyond the Russian Arctic Zone. Iceland was the first European state to sign a free-trade agreement with Beijing, and China’s first intergovernmental framework in the Arctic was struck with Iceland in 2012. Various Chinese state energy interests have been floated in geothermal resources in Iceland – but to date the projects have been abandoned. In 2018, the China–Iceland Arctic Science Observatory opened and continues to operate. Iceland strategically presents as a logistics hub that would act as a key shipping port between Europe and Asia along the NSR. It seems clear that Chinese Arctic strategy is to “internationalise” the Arctic in a way that features and promotes China’s strategic benefit. + +China is also driven by great power ideology and the prestige afforded by having a global polar footprint. Russia is aware of this simmering rationale for Chinese Arctic strategy. Efforts by China to move beyond the agreed terms of its mutually beneficial arrangement with Moscow within the Russian Arctic Zone, and how closely China adheres to the existing legal and sovereign arrangements of the Arctic Ocean, will certainly be a litmus test for the Sino-Russian Arctic “alliance”. + +Indeed, Sino-Russian strategic tensions remain, well beyond the overhanging fear of centuries of mistrust and the issue of the Russian Far East. In June 2020, Moscow accused one of its leading Arctic scientists, Valery Mitko, of spying for Beijing. Mitko was charged with treason for handing over classified information on Arctic research and submarine sensor technology to China. But perhaps more telling is the way that both countries have hushed up the incident, with neither formally commenting on the arrest. For now, Beijing and Moscow appear to agree to disagree – so long as Arctic LNG business is booming. + +The narrative of Moscow and Beijing working together to carve up the Arctic riches and take control of new global transport corridors has started to make its way into the policy and defence planning documents of Arctic-rim states. Washington’s litany of Arctic strategic planning documents – Naval, Air Force and Coast Guard strategies – feature renewed great power competition in the Arctic as a central security threat. However, the notion that there is a Sino-Russian Arctic alliance is a misinterpretation of the realities that drive China and Russia together in the Arctic. + +The realities of the Sino-Russian relationship (dubbed by both as one of “mutual benefit”) in the Arctic is best grasped when the limits of the partnership are considered. There are, first and foremost, limits in terms of geographical boundaries. The Russian Arctic Zone is the lion’s share of the Arctic region, home to the NSR and a vast percentage of Arctic resources. The Russian Arctic Zone is also the geographical “limit” of Sino-Russian Arctic “cooperation” as well. + +Of the eight members of the Arctic Council, Russia took the most convincing to grant China its observer status in 2013. Moscow approved membership, and with it, legitimacy, on the basis that Beijing explicitly acknowledged the sovereignty of Arctic-rim states and reaffirmed its commitment to the legal architecture of the Arctic region – the UN Convention on the Law of the Sea. + +Russia watches, with tempered suspicion, Beijing’s Arctic high sea missions and scientific research agenda in what China sees as a global commons. Yet within the Russian Arctic Zone, Russia welcomes Chinese engagement, but on Kremlin terms. Since 2014, with Western sanctions over Russia’s annexation of Crimea and sustained aggression in Ukraine, Moscow has had a cashflow problem. + +Despite key economic strategic partnerships in the Russian Arctic, China is busy diversifying itself throughout the region. China is actively engaging with other Arctic-rim powers and has commercial ventures, investment plans and entrenched soft-power strategies in Norway, Canada, Iceland and Denmark (through Greenland). + +___`Despite mutually beneficial interests in the Arctic, commercial realpolitik is at the heart of China and Russia’s engagement in the region`___ + +Russia’s Arctic strategy is built on both economic security and frontier border security objectives. The Sino-Russian relationship lends itself to these economic security interests and ambitions, but it is less effective at navigating Russia’s Arctic “siege mentality”. This is largely because of the kind of increased interest and activity that China is undertaking in the Arctic – and against which Russia seeks to secure its vast open frontier. Any deterioration in Sino-Russian ties could threaten this delicate balance. + +Russian efforts to securitise its economic interests in the Arctic fall short of an expansionist agenda. Beyond the posturing, ultimately Moscow’s Arctic priority remains regional stability. Continued regional cooperation with its NATO-member and Western Arctic neighbours remains a central strategic objective. After all, keeping the arena free of conflict is crucial to ensuring the NSR (and Russia’s future economic resource base) remains open and commercially viable. Russia needs to be able to deliver secure, trusted and unimpeded energy supplies from its northern frontier to Asian and European energy clients. + +The same cannot be assumed of Chinese Arctic interests, with clear indicators of an emerging expansionist agenda. While much of Beijing’s recent Arctic Ocean missions have been primarily about “raising the flag” and promoting soft-power public relations campaigns for domestic consumption, it is evident that China is set to stay in the Arctic. While much of the Arctic Ocean is delineated by territorial seas and agreed maritime boundaries, the central Arctic Ocean does hold international waters, which facilitates Chinese engagement. + +Fragmentation of Sino-Russian relations in the Arctic context might yet emerge from the outcomes of the Arctic continental shelf debate. Via the UN Commission on the Limits of the Continental Shelf, Russia, Canada and Denmark have all submitted formal, yet overlapping, claims to this continental shelf. Should a claim be upheld, the awarded state will then claim exclusive rights to the seabed and the resources beneath the area of the North Pole. This would block China’s access to seabed or resources in the international Arctic waters around the North Pole. + +Overall, continued efforts to put Moscow and Beijing in the same “basket” when it comes to great power competition in the Arctic “great game” is short-sighted and misses critical opportunities to futureproof the Arctic as a zone of international cooperation, collaboration and low tension. Sino-Russian Arctic ties will continue to be predictable to a large extent. Ties will remain mutually beneficial – until they are not. Predicting this point should be the priority for Arctic stakeholders. The problem appears to be, for now, that many stakeholders assume a fractured or fragmented Sino-Russian Arctic relationship does not exist. + +Russia and China’s Arctic relationship is not an alliance – it is driven by “win-win” thinking. Such framing is extremely subjective and prone to change. Despite mutually beneficial interests in the region, commercial realpolitik is at the heart of their engagement. For now, the partnership in the Arctic navigates existing fault lines elsewhere, such as Beijing’s failure to acknowledge Russia’s annexation of Crimea and Moscow’s nonalignment in the developing India–China conflict. + +Sino-Russian mutually beneficial cooperation and engagement within the Russian Arctic Zone is not a Sino-Russian alliance in the Arctic. In a somewhat Confucius-informed position, Beijing wants to “seek harmony and keep differences” when it comes to engagement with Russia in the Arctic. Both countries will remain engaged proactively and collaboratively across industrialisation projects, diplomatic relations and various commercial dealings in the Russian Arctic Zone. But when this “win-win” situation sours, Western Arctic states may indeed be faced with another Arctic security threat – a conflict between Russia and China in the Arctic. + +--- + +__Elizabeth Buchanan__ is a former Australian Department of Defence employee who is currently a senior fellow with the Australian Strategic Policy Institute (ASPI) and an Associate Researcher with the French Ministry of Armed Forces’ strategic research institute (IRSEM).