Transhipment Base: Is Kazakhstan Preparing to Fend off Secondary Sanctions?

Secondary sanctions have become a hot topic in Kazakhstan. Discussions occur not only in kitchens and offices but also at the highest level. Orda looked into the matter. 

Europe VS Russian Oligarchs

EU Special Representative for sanctions, David O'Sullivan, recently paid a visit to Astana. He said that the sanctions of the European Union are not aimed at third countries. The EU also does not seek to interfere in their existing trade relations with Russia according to O’Sullivan. Brussels is, however, keeping a close eye on the “abnormal commodity flows from a number of countries."

He added that a significant increase in exports from Europe to Kazakhstan being re-exported to Russia has caught the block’s attention. This particularly concerns sensitive products that can be directly or indirectly used by Russia against Ukraine.

"That's why we are meeting with our British and American colleagues today and tomorrow. In order to start a dialogue with the government of Kazakhstan in order to study the commodity flows in more detail, to determine if there is a problem, and, if there is one, to discuss how we could solve it,"

O'Sullivan said.

He also added that Kazakhstan is constantly consulting with the European Union on specific transactions. European export control also checks Kazakhstani companies for the legality of certain transactions. However, he did not specify which companies have been targeted. He only emphasized that Europe will not trade with Russian oligarchs who have fallen under sanctions despite efforts to circumvent them.

Uncle Sam’s Opinion

A round table was held in Astana the next day with Assistant Secretary of the Treasury of the United States, Elizabeth Rosenberg, Assistant Secretary of Commerce of the United States Matthew Axelrod and Director of the UK Sanctions Office David Reed.

"We have noticed a sharp jump in the supply of some goods to the territory of Kazakhstan since the beginning of the war. These are computer chips, as well as elements used in integrated electronic systems necessary for Russian missiles and drones. And if we compare the period before the start of the war and the present moment, then a fairly significant increase in the supply of such goods has been recorded. And at the same time, there was a sharp jump in the number of goods that were then transported from Kazakhstan to Russia,"

Matthew Axelrod said.

According to him, the amount for which priority goods were purchased is estimated in millions of dollars since the onset of the war. Axelrod also said that all goods came to the territory of Kazakhstan and then made their way to Russia.

The United States has taken note and secondary sanctions against Kazakhstan could be a realistic outcome.

"We have come to the conclusion that Russia is currently making attempts to evade sanctions in order to get the goods and components that this country needs to modernize its weapons. One of the ways is to supply these goods through third countries, such as Kazakhstan. I would like to point out that the delivery of such goods to the territory of the Russian Federation through the territory of Kazakhstan is a direct violation of export control, as well as US legislation,"

Axelrod added.

Secondary sanctions would nonetheless turn into restrictions for specific entrepreneurs and second-tier banks.

Risks for Kazakhstan

Both O'Sullivan and Axelrod made it clear that Europe and the United States know about the nature of the re-exports from Kazakhstan to Russia. But they have hitherto turned a "blind eye" to it. 

British investigative journalists reported on the re-export last autumn. They noticed unprecedentedly high numbers of household appliances, cars, and spare parts being sent from Kazakhstan to Russia.

But iPhones and washing machines are not the West’s main concern. Tech, such as microchips or heavy industry products, that can be used in the war against Ukraine is, however. 

EU’s Concern

A project to build a factory for the manufacture of railway wheels in Aqtobe caught the attention of the Federal Office of Economics and Export Control of Germany (BAFA). It is reportedly backed by the Russian oligarch Denis Safin. 

According to our sources, the organization has already received a letter with demands to check the Aqtobe deal for sanction circumvention. The German metallurgical company Eurolinex GmbH is worried that Russia will receive high-tech European equipment and will begin to supply its products to the EU as a Kazakhstani brand. If the audit establishes this, sanctions may also be imposed on the bank that has dished out money for the project.

The European Union has also announced the 11th package of sanctions against Russia. And it can already directly affect Kazakhstan.

The head of the European Commission, Ursula von der Leyen, spoke about the sanction package during her visit to Kyiv, DW reports.

The latest sanctions consist of three elements. The first part of the package will expand the list of prohibited goods that enter Russia through third countries. The EU also wants to create new tools that will prevent third countries from circumventing sanctions.

"If we see that European goods go to third countries and then end up in Russia, the European Commission may propose to member countries to impose sanctions against the export of these goods,"

von der Leyen said.

She noted that these measures will be used very carefully after a thorough risk analysis and approval by all EU members.

The third element is the prohibition of "shadow" structures from Russia and third countries that deliberately circumvent EU sanctions.

It had previously turned out that the new Aqtobe plant’s origins are tied to Russia. Investments from Russian sources are not illegal unless they come from a sanctioned source. The director of the LLP is Boris Bilonenko. His namesake was listed as the legal adviser of the Zagorsk Pipe Plant (ZPP) in 2018-2020. Safin owns the plant. His functions included performing the duties of a nominal director and representing the interests of the company in various judicial bodies of the Russian Federation.

His alleged father, Viktor Bilonenko, was listed as Deputy Director for Technical Development of the Zagorsk Pipe Plant until recently. That’s how the media portrayed it at the end of July 2022, at least.

Deputies’ Reaction

According to our sources, the company cannot directly purchase equipment in Europe with Russian money. The LLP would have had to take a bank loan in Kazakhstan to do so. If any quasi-governmental financial structure or a second-tier bank had provided it, a sanction slap could be felt. Such a turn of events also could be problematic for ordinary Kazakhstanis. 

Kazakh deputies have sounded this alarm. They have already demanded Prime Minister Smailov to name companies and banks that violate sanctions against Russia. The deputies have highlighted that in the case of secondary sanctions, Kazakhstan’s economy and business would pay the price, thus reducing people’s standard of living Majilismen should surely remember the social upheavals caused by the abrupt liquidation of popular Kazakh banks ("Bank of Astana", "Qazaq Banki", "Tengri bank" and others).

"Did they indicate specific Kazakhstani companies or banks that violate international restrictions? If so, which companies have been noticed in such violations, and whether an appropriate investigation will be appointed against them,"

Azat Peruashev's deputy request says.  

Kazakhstani banks are indeed obliged to carefully check cross-border transfers in order to avoid a claim of potential sanction violations.

Kazakh government agencies are not all that willing to answer direct questions about the above-mentioned project, limiting themselves to dry responses. Our editorial board has therefore sent a request directly to BAFA.

The BAFA organization (Bundesamt für Wirtschaft und Ausfuhrkontrolle), Germany, and Kazakhstan cooperate in controlling the export and import of goods, technologies and services that can be used for military purposes or human rights violations.

If the BAFA does prove that Kazakhstan is helping Russia circumvent European sanctions, it can take a number of measures, including:

• Conducting an investigation and collecting information about possible violations. This may include checking documentation, audits and other actions aimed at identifying violations.
• Suspension or cancellation of the issuance of licenses for the export and import of goods to Kazakhstan. BAFA may take measures to terminate or reduce trade relations with Kazakhstan if it finds that Kazakhstan violates export control rules.
• Notification of other countries and international organizations. BAFA can report its findings to other countries and organizations that may have an interest in export control.
• Bringing violators to justice. If violations are detected, BAFA may take measures aimed at bringing violators to justice in accordance with applicable law.
• Conducting additional consultations and negotiations. BAFA may hold additional consultations and negotiations with Kazakhstan to resolve problems and resolve issues related to the control of exports and imports of goods.

Kazakhstan's Reaction

The Aqtobe region akim’s press service explained that the regional administration is not responsible for checking the investment source. As an executive body, their task is to provide land for the plant’s construction and bring all the necessary communications to it.

The Ministry of Trade and Integration recalled that the Republic of Kazakhstan has not joined the sanctions against the Russian Federation and the Republic of Belarus. It accordingly does not apply restrictive measures in trade with these countries. But it has also been emphasized that the republic will not serve as a platform for Russia to circumvent these sanctions. 

"Thus, the supply of sanctioned goods from the territory of Kazakhstan to Russia is not prohibited, however, such operations may raise questions from the side of the country applying sanctions and entail the application of secondary sanctions. In addition, we would like to note that an information portal has been developed and launched to promptly inform domestic enterprises, which contains up-to-date information about anti-Russian sanctions (http://traderadar.kz/),"

reads the response to our official request

The Ministry of Foreign Affairs of Kazakhstan also has nothing to do with the verification of specific projects. Kazakhstan is not in a position to support Western economic sanctions against Russia as well. 

Monitoring of foreign investments in Kazakhstan is carried out by the National Bank of the Republic of Kazakhstan, the Agency for Regulation and Development of the Financial Market of the Republic of Kazakhstan, the Agency for Financial Monitoring of the Republic of Kazakhstan, the Astana International Financial Center.

Banks Under Pressure

Chairman of the Agency for Regulation and Development of the Financial Market of the Republic of Kazakhstan (ARDF), Madina Abylkasymova, at a Majilis session on April 25 said that all financial organizations in Kazakhstan have significantly strengthened sanction compliance procedures. The restrictions imposed on the use of foreign currency in settlements and work with sanctioned persons included in various lists have also been beefed up.

"Now the question is more that when conducting some trading operations, it is important that the banking system is not used to circumvent sanctions. To regulate this issue, we have approved detailed requirements and regulations for each sector of the financial market in accordance with FATF requirements. That is, separate resolutions and regulations on the banking sector, the insurance market, the securities market and the microfinance sector,"

Abylkasymova said.

According to her, there have been no notifications from Western regulators on Kazakhstani banks’ involvement in circumventing sanctions.

The editorial board sent an official request to ARDF asking to comment on the situation and share which Kazakhstani banks are being checked by Western regulators.

Kazakhstan is still preparing for investigations that may be initiated by third countries. The authorities have developed legislative measures to respond to the corresponding risk.

The portal "Open NPAs" has a draft Rules for the interaction of state bodies of the Republic of Kazakhstan:

”in the case of investigations preceding the application of trade and security measures by a third party in relation to goods originating from the Republic of Kazakhstan".

The complex wording suggests cementing Kazakh government agencies’ actions for the investigation of cases related to the circumvention of sanctions.

Original Author: Ilya Astakhov

Disclaimer: This is a translated piece. The text has been modified, the content is the same. Please refer to the original article in Russian.