WASHINGTON – Days before Russia launched its full-blown invasion of Ukraine in February 2022, Boris Livshits ordered a military-grade spectrum analyzer from a Florida-based company for delivery to a suburban home in New Hampshire.
Livshits, who resides in Russia, had been ordering dual-purpose technology totaling millions of dollars from American companies for shipment back home via U.S.-based intermediaries and shell companies for years.
According to U.S. legal filings, the elaborate scheme was meant to disguise the end user of the controlled products: the Russian military-industrial complex.
Compliance with sanctions, for the most part, has been pretty reasonable. The one area where people are struggling, including in the U.S., are the export controls, and I think that's where there's a lot of focus.”-- Brian O’Toole, Atlantic Council analyst
The spectrum analyzer – which measures electronic signals and can be used on a battlefield or for countersurveillance operations – was repackaged by Aleksei Brayman at his New Hampshire residence and then shipped to a pickup point in Germany used by Russian intelligence for delivery on to Russia.
The United States broke up the Russian-led network late last year, arresting Brayman and another American citizen for allegedly helping Livshits export controlled products to sanctioned entities. Estonian police arrested a third individual -- suspected Russian Federal Security Service (FSB) officer Vadim Konoshchenok -- at the request of the United States as he attempted to smuggle the controlled goods across the border into Russia. Four other Russians, including Livshits, have been charged with conspiracy to violate sanctions, wire fraud, and money laundering but are not yet detained.
The scheme was one of possibly hundreds, by some estimates, set up by Russians to get around sweeping Western financial sanctions and export controls imposed on Russia for its invasion of Ukraine in February 2022.
The United States and Europe have slapped more than 11,000 restrictions on Russian individuals, companies, products, and technologies, including the export of microprocessors, to degrade Russia’s economy and its ability to wage war.
However, Russia has withstood the tsunami of Western financial and export curbs better than initially expected, helped by several factors, including high energy prices, the reorientation of its economy toward Asia, higher government spending, and sanctions circumvention.
Now, as the war and the sanctions process enter their second year, the United States and its allies are focused on beefing up enforcement and closing loopholes to further hobble Russia’s economy and war machine.
“Compliance with sanctions, for the most part, has been pretty reasonable,” Brian O’Toole, a former senior adviser at the Treasury Department who is now an analyst at the Atlantic Council think tank, told RFE/RL. “The one area where people are struggling, including in the U.S., are the export controls, and I think that's where there's a lot of focus.”
Russia’s economy contracted 2.1 percent last year, according to the government’s statistics service, Rosstat, avoiding the apocalyptic forecasts of a 10 to 15 percent decline made by many economists in the days following the first round of Western sanctions.
That said, some economists question whether Rosstat is manipulating the data as President Vladimir Putin seeks to paint a picture of Russian resilience in the face of sanctions. His government has halted publication of some statistics, making it harder to assess how the economy is performing.
“Russia has made statistics a tool in its disinformation war,” Agathe Demarais, the global forecasting director at the Economist Intelligence Unit and the author of a book on sanctions, wrote in a column last month for Foreign Policy.
Furthermore, experts say the state of the Russian economy is worse than the Rosstat data indicates, pointing out that the better performance was driven by military spending that does little to improve living standards. Russians cut their spending last year at the fastest pace since 2015 as the war took its toll on consumer confidence.
Nonetheless, Western governments are searching for new ways to tighten the grip of the sanctions.
Red Flags
The United States and its allies are taking a two-pronged approach to narrow the scope for sanctions evasion, helping domestic companies identify bad actors while nudging third countries to take action on smuggling and money laundering.
In their first collective effort to tackle the problem, the Justice, Treasury, and Commerce departments on March 2 issued a joint note to U.S. companies advising them on how to weed out network schemes like the one allegedly run by Livshits.
“Our economic tools are constraining Russia – so much so that the Kremlin has tasked their intelligence services with finding ways to get around international sanctions and export controls,” Andrea Gacki, the director of Treasury’s Office of Foreign Assets Control (OFAC), said in the joint statement, adding the private sector is “an essential partner” in the fight.
The joint note highlighted several “red flags” that could indicate whether a client is attempting to evade sanctions, such as using an IP address that does not correspond to the client’s reported location; making last-minute changes to shipping instructions that appear contrary to customer history or business practices; paying for a product via a third-party country or business not listed on agreements; using a personal e-mail account when ordering; or not having a corporate website.
O’Toole said it can take a while for compliance teams at U.S. companies to notice new patterns of evasion they haven’t previously dealt with.
Livshits may have inadvertently exposed his network to U.S. law enforcement when, in an April e-mail fired off to the Florida-based electronics company to complain about the calibration of the spectrum analyzer, he mentioned he was in Russia.
In response, an employee at the U.S. firm told Livshits that, due to sanctions, he has been “strongly cautioned not to speak with you anymore or have any dealings with your associates in the US," the Justice Department indictment states. It is unclear if the Florida firm was the first to contact U.S. law enforcement about Livshits.
Eight months later, Livshits’ U.S. associates were arrested.
Gutted For Their Chips
Meanwhile, U.S. officials are making the rounds of their counterparts in nations whose companies or financial sectors are helping Russia circumvent Western curbs.
The United States has warned that foreign companies could lose access to Western markets if they do business with Russian entities subject to U.S. restrictions.
U.S. Secretary of State Antony Blinken traveled last week to Kazakhstan and Uzbekistan to discuss a host of issues, including sanctions enforcement. Former Soviet states, along with Turkey and China, have been key conduits for banned goods to Russia and sanctions-skirting financial transactions.
“We are watching compliance with sanctions very closely,” Blinken said at a February 28 press conference with his Kazakh counterpart in response to a question about potential sanctions against Kazakh companies.
Weeks earlier, Brian Nelson, the Treasury Department's top sanctions official, traveled to Turkey and the Middle East to deliver similar messages.
Sales of Western-made smartphones, white consumer goods, and other technologies to Russia’s neighbors have surged over the past year in one of the clearest signs of how Moscow is circumventing restrictions. The goods are then exported to Russia, where they are sometimes gutted for their chips.
The Commerce Department last month tightened export controls to narrow that loophole.
The note by the three U.S. departments highlighted the former Soviet states of Armenia and Uzbekistan as two destinations used by Russia to illegally import restricted goods.
Kazakhstan and Kyrgyzstan are also key transshipment nations, experts say. Armenia, Kazakhstan, and Kyrgyzstan are members of the Russia-led Eurasian Economic Union (EEU), which allows for the freer movement of goods between countries.
During the joint press conference with Blinken, Kazakh Foreign Minister Mukhtar Tileuberdi said the lack of a customs border with Russia makes it “very difficult to manage” sanctions evasion.
In one recent example, PKK Milandr, a sanctioned Russian microelectronics company that is part of the country’s military-industrial complex, used Armenian- and Swiss-based firms to order and pay for foreign integrated microchips, the United States has alleged.
The United States in November sanctioned the Armenian and Swiss firms and their executives.
Tatiana Orlova, an economist at U.K.-based Oxford Economics, said it could be tough for the West to curtail the level of evasion and warned compliance could weaken with time.
If the West shuts down a Russian scheme in one country, another will pop up somewhere else, she said.
“At some point, it may become a game of whac-a-mole,” Orlova told RFE/RL.
Russia’s neighbors may also be reluctant to clamp down on smuggling because of the economic benefits, she said.
Bleak Outlook
Nonetheless, Orlova downgraded her long-term economic growth forecast for Russia to between 0.8 and 1.0 percent from 1.6 percent, due to the sanctions and export controls.
She is expecting Russia’s economy to contract 0.4 percent this year, though that is contingent on the course of the war.
Meanwhile, Demarais wrote in her column that Russia is unlikely to acquire the high-tech components it needs through illicit trade.
She estimates it will take about five years for Russia’s economy to get back to 2021 levels as Western sanctions compound other headwinds like Russia’s worsening demographics and chronic low worker productivity.
“Sanctions are biting, and things will not get better for Russia anytime soon,” she wrote.
