Since Vladimir Putin launched his full-scale invasion of Ukraine and invited the largest international sanctions regime against Russia since the Second World War, Central Asia and the Caucasus have been forced into an uncomfortable position at the front of the accompanying economic war. The region finds itself in a position that its constituent states did not choose, and its countries have engaged in complex and differentiated balancing strategies, The Caspian Post reports citing Foreign Policy Research Institute.
Notably, not one has brought the sanctions into its legislation and regulation, though most have quietly pushed for compliance to avoid the significant risks that come with falling afoul of those issued by the West and the United States in particular. The sanctions have undeniably had some costs for the region-particularly for businesses deeply integrated into Russia, or whose leadership is. However, forcing the Kremlin into an economically defensive position has also inadvertently opened up new opportunities for the region, some of which offer potential long-term benefits while others carry significant risks.
To more fully understand the impact of sanctions on the region, one must first examine their initial impact within the wider context of the ructions from Russia’s full-scale invasion of Ukraine. These disturbances include the brain drain and population shifts out of Russia that began shortly after and ramped up dramatically, if briefly, following the Kremlin’s introduction of conscription in September 2022. Then, the trade changes that the region has experienced in 2023 and 2024 can be more fully appreciated, and the importance of the region going forward can be understood. The economic battlefield has shifted from managing the fallout of Putin’s weaponization of hydrocarbon supplies to restricting the trade into Russia that the Kremlin depends on to feed its war machine. Finally, examining the attitude and positioning toward the region of sanctions-imposing countries forms a picture of how Central Asia’s position is likely to shift-or be shifted-going forward. Sanctions are not a perfect tool, but they have become, and are likely to remain, the key instrument in the West’s geoeconomic approach to Russia, China, and other geopolitical challenges. They will, therefore, continue to shape Central Eurasia’s economic and political relationships with all of its key markets and regional powers.
It may seem counterintuitive, given one of the key aims of the sanctions imposed on Russia has been to restrict trade with Russia, but trade with Russia has boomed for Central Asia and the Caucasus since 2022. Much of this has been driven by trade rerouting as European exports to Russia declined and were instead rerouted through the region. According to a June 2024 Oxford Economics report, export increases to Russia in 2022 amounted to 5 percent in Georgia, 30 percent in Kazakhstan, and a remarkable 193 percent in Armenia, fueled by a marked increase in imports from the EU across all the countries in the region studied in the report as well. Research from the European Bank for Reconstruction and Development has underlined that goods subject to Western export controls imposed on the Kremlin as part of their sanctions regimes have formed an outsize share of such trade so rerouted. Reports of white goods, such as washing machines and refrigerators being shipped through the region so Russia could pick them apart for dual-use components, garnered international headlines within a year of the war.
This trade is only part of the picture. far more important for the region was the massive influx of Russian nationals and capital, particularly to Kazakhstan, Georgia, Armenia, and to a slightly lesser extent Uzbekistan and Kyrgyzstan. The flows were so significant that Georgia’s and Armenia’s currencies boomed as demand from Russian capital and those fleeing conscription boomed. They became the world’s best performers against the US dollar that year alongside Tajikistan, a particularly remarkable feat given the rise of US and other key central bank interest rates to deal with global inflation largely driven by the energy crisis Putin’s war initiated.
It would also be an oversimplification to say that Central Asian and Caucasus countries turned a blind eye to the risks of Russian sanctions. The region’s key banks swiftly ended key “correspondent banking” relationships with Russian counterparties that came under Western SWIFT sanctions, cutting them off from the global intrabank messaging system. Even governments that took a position of explicitly stating they would not join the sanctions regime because of the perceived risks of Russia’s response have permitted regulatory authorities to issue strict guidance. For example, Georgia’s central bank has repeatedly issued guidance calling on the country’s financial institutions to operate “in accordance with restrictive measures-financial sanctions imposed by the USA, the European Union, and Great Britain against the Russian Federation.” The sanctions that are most effectively enforced internationally-precisely such financial sanctions-have had the most impact in Central Asia and the Caucasus. Even countries with relatively few connections to the international financial system, such as Tajikistan, have seen broad compliance with measures introduced since 2022, including those targeting the payment systems that the Kremlin has engineered to try and mitigate the impact of such sanctions.
Nevertheless, the dichotomy between regulatory actions and those taken by risk-averse compliance teams and the statements and actions of governments in the region is inescapable. In particular for Georgia-which has been the country in the region closest to the West since its 2004 Rose Revolution-this disjunction has caused substantial diplomatic and domestic political strain. That, too, is the case in countries that have less established democratic traditions such as Kazakhstan, whose leader, Kassym-Jomart Tokayev, arguably owes his continued presence in the presidency to Russia’s intervention in the country just a month before it invaded Ukraine. Tokayev has repeatedly pledged to “follow the sanctions regime” while calling for continued “comprehensive cooperation with Russia.” Kyrgyzstan-which has drifted closer to Russia since President Sadyr Japarov came to power in 2020-has also sought to avoid accusations that it is turning a blind eye to trade sanctions imposed on Russia.
Countries imposing sanctions on Russia have not been blind to the region’s complications and interconnectedness with the Russian economy, however. When the Russian-Uzbek billionaire oligarch Alisher Usmanov was sanctioned in March 2022, the US Office of Foreign Asset Controls (OFAC) simultaneously issued General License 15 as one of its broadest-ever licenses carving out his Uzbek business interests from being automatically subject to the restrictions placed on him. This appears to have been an attempt to convince Tashkent to restrain his influence in the Uzbek economy, which has grown substantially under President Shavkat Mirziyoyev-to whom he is related by marriage-though it was relatively unheeded as Uzbekistan lobbied to have sanctions on Usmanov reversed. The license was withdrawn in April 2023 and Usmanov’s facilitators, including some Uzbek nationals, were additionally sanctioned.
The US has similarly used its sanctions to warn other regional leaders of moving too close to Moscow. The September 2023 designation of former Georgian General Prosecutor Otar Partskhaladze, a close ally of Bidzina Ivanishvili, the country’s dominant political figure and honorary chair of the ruling Georgian Dream Party, for working together with Russia’s Federal Security Service “for the benefit of Russia.” Although neither Partskhaladze’s nor Usmanov’s designations have resulted in about-faces from Tashkent or Tbilisi, there are potential other areas of success. One Russian oligarch who was sanctioned by the UK in September 2022-Igor Makarov-was long known to be close to Turkmenistan’s Berdymukhamedov regime. In fact, it is in that country that he was predominantly active since selling his Itera energy trading and hydrocarbons business to Rosneft in 2013. London lifted the sanctions on him this March after he gave up his Russian citizenship. Given Makarov’s purported involvement in the Russian-Ukrainian gas trade of the early 2000s, which was long at the heart of the Kremlin’s strategy of keeping economic influence over Ukraine, and his role as one of the few businessmen to regularly visit the Berdymukhamedovs, the wider as-of-yet-unpublicized details of the deal that was struck for his delisting may prove helpful to Western policymakers seeking to counter regional Russian economic influence in the future.
This nuanced approach to the region-and to differentiating between how to apply sanctions to different governments within it-is also clearly evident in two other areas of sanctions.
First, there are sanctions on companies that have been set up to avoid and evade sanctions on imports into Russia. Thus far, Western designations of companies in the region have been concentrated on those explicitly established to do so. The Kazakh, Uzbek, and Armenian companies that have been sanctioned thus far are largely such trade facilitators. No financing partners or regional authorities have been designated for overlooking or failing to catch these. The threat of fines and designations for the doing so, however, is increasing as a result of the December 2023 US Executive Order 14114 expanding secondary sanctions and the June 2024 OFAC guidance emphasizing that this encompassed all financial institutions, even those who “unknowingly” facilitate them. Europe is also taking steps to introduce its own version of secondary sanctions through its “anti-circumvention measures.” Once again, regional regulators have been taking steps to enhance compliance, for example in Kazakhstan where the Central Securities Depository ordered brokers and managers to divest from Russian securities in July. While financial services sanctions are somewhat easier for regional governments to push compliance with, it will be up to the companies that produce the dual-use and critical technology items or license the underlying intellectual property to take the lead in overseeing compliance for the trade sanctions to be truly effective. Those are predominantly Western firms. Almost none are firms based in Central Asia and the Caucasus. The risk-reward mechanics thus far have failed to achieve this, as Elina Ribakova has eloquently argued in Financial Times.
Second, the West’s differentiated approach concerning sanctions on Russia in the region is particularly clear in natural gas markets. While it was Russia that turned off the gas taps to Europe in 2022, as the continent adjusted by turning to alternatives from Algeria, Azerbaijan, and in particular liquefied natural gas (LNG) tanker shipments, Brussels has recently begun to sanction Russia’s gas market. The US has also sharpened its sanctions on Russian LNG in particular, with the designation of the Arctic-2 project in September 2023. However, both Europe and the West have turned a blind eye to the region itself increasing natural gas imports from Russia. This has been the case even in Azerbaijan, which in 2022 agreed to import Russian gas to try and meet commitments to increase deliveries of its own piped gas to Europe. There has been no Western opposition to this, nor has there been public opposition from sanctions-imposing countries to more voluminous deliveries sought by Uzbekistan, which in 2023 agreed to begin importing 2.8 billion cubic meters of natural gas annually from Russia and aims to increase that nearly fourfold by 2030. There is precedent for such regional pragmatism in oil markets as well, particularly in the case of Kazakhstan, which is still dependent on Russian export routes for more than 90 percent of its oil sales. After European sanctions barred most pipeline deliveries of crude from Russia, the EU and other sanctions-imposing countries did not stand in the way of Kazakh oil being shipped through the route instead. This is a remarkable turnaround in Astana’s own position, given that it was itself subject to threats from Russia in 2022 to toggle off its oil exports if it did not take a sufficiently pro-Russian position, a tactic that clearly failed. So, while trade sanctions may still bring more costs to the region, in both oil and gas markets, the impact of the international sanctions regime on Putin’s regime has actually been to tip the balance of interests in regional energy markets away from Russia and toward the Central Asian states.
Sanctions will remain a delicate dance for the region. Although the countries themselves have not explicitly joined the regime, they have proven more successful at challenging Russian influence in key markets and potentially through regional elites. The region’s inherent geography means that Russia will continue to seek to use it to evade import sanctions in particular. The West must build on the successes that the regime has had thus far-particularly as sanctions-imposing countries look to navigate divisions among themselves about the approach to Russia following the election of Donald Trump in the US while also seeking to sharpen their own controls and regulations for the accompanying likely increase in trade controls and limitations applied to the region’s other major neighboring power, China.
