The Caspian Post presents an interview with Stanislav Tkachenko, Doctor of Economics and Professor at St. Petersburg State University.
- How do the countries of Central Asia and the Caucasus balance between Western sanctions against Russia and their economic dependence on it? How have trade relations between Central Asian and Caucasus countries and Russia changed since the sanctions were introduced?
- Initially, from early spring 2014, Western sanctions consisted of individual restrictive measures by the U.S. and EU. These included travel bans and asset freezes targeting a limited group of high-ranking Russian political leaders, business figures, and some defense enterprises. These measures had no impact on Russia’s economic ties with the countries of the Caucasus and Central Asia.
From July 2014, the situation began to change as Washington and Brussels synchronized their sanction policies, extending them to specific sectors of the Russian economy, particularly finance and the defense industry. However, these steps did not formally limit Russia’s cooperation with its neighboring states.
By 2014-2015, however, Western politicians and diplomats began warning CIS countries of potential restrictions against companies collaborating with Russia in the affected sectors. This particularly applied to so-called "blocking sanctions," which completely prohibited any interaction with specific companies or individuals. Regarding "sectoral sanctions," which are more targeted and restrict specific business operations, countries in the Caucasus and Central Asia leveraged ambiguities in these measures to maintain ties with Russia.
Since the U.S. has long insisted on the extraterritorial nature of its sanctions through secondary sanctions, these measures became the most disruptive to Russia’s interaction with its neighbors following February 2022. In this intensified "economic war," sanctions became the primary tool of pressure. Under these new conditions, the threat of secondary sanctions limited the ability of Caucasus and Central Asian countries to use previously lawful means to circumvent sanctions. Many regional partners were forced to either sever ties with Russia or operate in a "gray zone," using small intermediary companies that risk closure if their collaboration with Russian partners, such as parallel imports or import substitution initiatives, is exposed. Some regional companies also participated in supplying sanctioned goods to Russia. Although this activity is considered unlawful from the Western perspective and little is known about it, companies from China, Turkey, the UAE, and India are likely leaders, with the Caucasus and Central Asian states playing a smaller role.
- What new economic opportunities have arisen for the region due to sanctions against Russia, and what risks are associated with them?
- New opportunities primarily involve participating in Russia’s efforts to substitute imports traditionally sourced from Western countries. These include intermediary or direct deliveries of industrial equipment, components, raw materials, and software required for producing "substitute" goods. Another area involves financial transactions for acquiring sensitive goods from Western countries. While these operations likely generate significant profits for intermediaries, they carry the risk of U.S. and allied sanctions and are conducted discreetly, entirely "in the shadows."
- How have sanctions affected the migration of Russian labor and capital to countries such as Kazakhstan, Georgia, Azerbaijan, and Armenia?
- The impact is noticeable but limited. Kazakhstan and Armenia were the first to welcome tens of thousands of Russian specialists at the start of the special military operation (SMO). However, as this relocation wave diminished and its geography expanded, Azerbaijan, Georgia, and Uzbekistan emerged as significant destinations for relocating individuals and businesses.
In 2022, many Russian companies opened branches or subsidiaries in the Caucasus and Central Asia to escape Western sanctions. However, only a few of these entities engaged in full-scale business activities, suggesting minimal capital or technology outflow from Russia. Instead, they primarily facilitated operations for their Russian parent companies under the guise of foreign jurisdictions. Russian experts and entrepreneurs relocated to these branches, reflecting some workforce migration, though its scale should not be overstated.
The most significant wave of relocation occurred in September-October 2022, during Russia’s partial mobilization. However, by mid-2023, over 60% of those who had left returned to Russia. Many discovered that domestic conditions for doing business, supported by a growing national economy, were more favorable than abroad.
Russian investment flows to neighboring countries have remained stable, with minor fluctuations since the start of the SMO and Western sanctions. Russian companies continue to establish local production chains, preferring direct control over operations in neighboring countries to avoid risks from secondary sanctions.
- How are regional governments and financial institutions in Central Asia and the Caucasus responding to tightening sanctions, including U.S. and EU secondary sanctions?
- Governments in the Caucasus and Central Asia maintain a cautious stance on sanctions. Officially, they neither endorse nor actively oppose them. On the business front, responses vary widely: while banks and financial institutions often comply with sanctions, industrial and trading companies explore all possible ways to circumvent them.
The modern global economy offers ample opportunities to bypass Western sectoral sanctions, enabling Russia to acquire imported equipment and components from major economies in the Global South (BRICS, Vietnam, Indonesia, Pakistan) and even from Western countries. However, the costs of organizing parallel imports from these nations continue to rise. Imports of sanctioned goods from the U.S. and its allies are likely to dwindle, not due to the sanctions themselves but because Russian industries can more easily and affordably source necessary components and equipment from the Global South.
- Why do Western countries show flexibility regarding the import of Russian energy resources through Central Asia and the Caucasus, despite the general sanctions regime against Moscow?
- Since the oil crises of the 1970s, the global energy market has operated under its own rules, distinct from other sectors of the global economy. These rules, established after the "oil shocks" of 1973-74 and 1979-80, created a liberal regime for crude oil and petroleum products, encouraging market expansion and cross-border investments. Today, the oil market remains the largest commodity market, governed by minimal regulatory norms set by the International Energy Agency and OPEC+.
Dismantling this half-century-old structure is politically risky for Western countries. Oil remains the primary energy source for transportation, utilities, power generation, and petrochemicals. Any disruptions to this market could lead to price spikes, inflation, slower economic growth, or even recessions.
For over 30 years, Russia has been among the top three global oil producers, alongside Saudi Arabia and the U.S. Sanctions that significantly reduce Russian oil production or exports would destabilize this volatile market. Notably, in the past 12 years, oil prices have fluctuated from nearly $150 per barrel to less than $20, causing bankruptcies in the oil industry and economic hardships worldwide.
Western countries thus face a complex equation in their sanctions policy against Russia's energy sector. They aim to maintain Russian oil production and exports while reducing revenue to Russia's state budget. Moscow has successfully countered these measures by redirecting oil exports from Europe to Asia. Today, nearly 90% of Russian oil flows to China and India, two economically powerful allies. As a result, Western leverage over transit states in the Caucasus and Central Asia is waning and has little impact on Russia’s efforts to redirect its oil exports to the Global South.
