Page 12 - bne IntelliNews monthly magazine April 2025

12 I Companies & Markets bne April 2025
The mirror mechanisms have a long history in Russian finance and have been used to avoid multiple restrictions on certain transactions in the past. For example, in the early noughties foreigners could not buy the highly attractive locally traded Gazprom shares, so brokers set up parallel mirror schemes: a Russian entity bought local Gazprom
“Western authorities have no access to the data on the transfer of rubles between the accounts, nor are they even aware that a certain Chinese company has a ruble account with a Russian bank”
shares, but a mirror proxy was available in London for dollars that exactly matched the value and size of the Russian pack- age. An investor could buy the mirror proxy that gave de facto ownership of the local shares, but not de jure, as the investor never directly owned the shares and in this way foreign inves- tors bought hundreds of millions of dollars’ worth of shares openly and legally.
“Western authorities have no access to the data on the trans- fer of rubles between the accounts, nor are they even aware that a certain Chinese company has a ruble account with
a Russian bank.”
Even as US regulators attempt to tighten restrictions on Chinese banks suspected of facilitating Russian payments, the ability of businesses to shift to new intermediaries makes enforcement a problem. In particular, the threat of second- ary sanctions on a Chinese bank only works if that bank has a branch in the US, but many of the smaller Chinese banks have purely domestic businesses, making them immune from the threats.
One of the report’s key findings is that Western sanctions may have reached the peak of their effectiveness. While they have undoubtedly have made business more expensive for Russian firms, they have also fuelled the expansion of alternative financial networks, which have become increasingly sophisti- cated as they cater to this new business and at the same time reduce the transparency of global trade.
A particularly stark comparison is made with US Prohibition (1919-1933), where efforts to ban alcohol led not to abstinence but to the rise of organised crime. Similarly, financial restric- tions on Russia have not halted trade but have pushed it into the shadows, where it is harder to track and regulate.
“The assumption that sanctions can significantly reduce
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Russian foreign trade is as naive as believing that alcohol bans would turn millions of drinkers into teetotallers,” the report states.
Meanwhile, Western businesses have also been affected. European suppliers that once dealt directly with Russian buyers are now using third-party intermediaries, often at higher costs and with less oversight. In some cases, compli- ance departments of Western firms, seeking to avoid risk, have implemented stricter-than-required restrictions, inadvertently driving their own companies into inefficient workarounds. Big international players like Apple have closed all their Russian franchises down, but the iPhone is as available in Moscow stores as it was before the war; all that has happened is where Apple used to import some 25mn units a year directly, now the same phones traverse coun- tries like Turkey via a plethora of smaller traders and the entire supply business has become opaque.
The Future of Sanctions: Rethink or Reinforce?
With Russia’s international trade turnover estimated at $600bn to $800bn annually, the idea that it could be isolated entirely now appears impossible. Russia’s market is too big
to sanction and few multinationals are willing to give up so much business. As bne IntelliNews reported, less than 9% of international companies that were working in Russia pre-war have actually left, and of those that did, most are still using the traders to supply the market, but keeping this business
at arm’s length.
The CASE report suggests that Western policymakers face
a choice: either intensify enforcement, risking further entrenchment of illicit networks, or rethink their strategy by legalising and taxing certain transactions to regain some measure of control.
The latter approach mirrors how the US government ulti- mately abandoned Prohibition, replacing it with a regulated alcohol market that ensured tax revenues flowed to the state rather than criminal enterprises.
Whether Western leaders choose to double down on sanc- tions or adopt a more pragmatic approach remains to be seen. The new trump administration has suggested that some sanctions maybe lifted but has yet to make its plans clear. But as the past three years have demonstrated, financial isolation is far easier to legislate than to enforce.
“The assumption that sanctions can significantly reduce Russian foreign trade is as naive as believing that alcohol bans would turn millions of drinkers into teetotallers”