Crimean sanctions: What are they and how do they work?

A total of 41 countries have joined “Crimean sanctions”, including the United States, Canada, Japan, Norway, Switzerland, Australia, New Zealand, the United Kingdom, and others. The Ukrainian law "On Sanctions" was adopted in 2014 but, in practice, Ukraine only started applying personal sanctions in 2015, which became widespread only in 2018.

Ukraine imposed sanctions on hundreds of individuals and legal entities. They include leading Russian companies and officials, Crimea’s occupant authorities and businesspeople who sponsored them, as well as organizers and participants of the occupation. In 2021, Ukraine adopted a law abolishing the Crimea Free Economic Zone, which prohibits the supply of resources to the occupied peninsula, doing business as well as the issuance of special permits and licenses to companies operating in the Crimea, among other things.

Ukraine still hasn’t applied sectoral sanctions against Russia, limiting itself to personal ones. The intentions to introduce a so-called "Sentsov List" package of sanctions in response to systemic human rights violations by Russia in the occupied territories of Ukraine and against Ukrainian citizens have not yet been implemented.

The reason is the imperfection of the sanctions legislation and the lack of political will. The register of sanctions should be open – Ukraine needs a single body that would coordinate Ukraine's sanctions policy. It is important to synchronize Ukrainian and international sanctions and understand who is responsible for violating sanctions, when, and how.

The West has not introduced restrictive measures such as blocking the foreign reserves of Russia’s Central Bank, banning the purchase of Russian government bonds – not just in the primary market, like now, but also in the secondary – and expanding sanctions against the Russian banking sector to the point of disconnecting from international payments system SWIFT. This would very quickly lead to the collapse of the financial system of the Russian Federation. But the devastating effect of such sanctions is excessive. The United States and the European Union consider it necessary to increase sanctions pressure on Russia gradually, depending on how stubborn Russia is in violating international norms.

Western sanctions prohibit:

• Making any investments in Crimea

• Creating joint ventures in Crimea or with Crimean companies

• Supply of goods and technology for:

-searching and extraction of minerals

-transport

-energy

-radio, television, internet, and mobile services

• Providing tourism services in Crimea, including cruises

• Trying to circumvent sanctions in any way

Ukrainian legislation prohibits:

• Exporting and importing goods to and from Crimea

• Supplying resources to Crimea, including water and electricity

• Extraction of minerals from Crimean subsoil and the sea shelf

• Issuance and use of licenses and special permits to conduct activities in Crimea

• Visiting Crimea by any means other than via official Ukrainian entry-exit checkpoints

The "Crimean" sanctions are largely felt by Russia, and especially by Crimea. But the effectiveness of sanctions manifests itself differently in different sectors of the economy.

In the military-industrial sector, Russia has been forced to curtail a number of defence projects at sanctioned Crimean enterprises. In addition, due to the sanctions ban on the supply of Western and Ukrainian engines to the Russian Federation, the implementation of important Russian projects in military ship and aircraft construction has been delayed.

In the financial sector, sanctions have made it impossible for banks to operate normally in Crimea. In July 2014, there were 33 small Russian banks working in Crimea and Sevastopol. In 2021, only six banks remain on the peninsula. These banks cannot issue Visa and Mastercard cards on the peninsula. Crimeans are forced to order these cards in Russia and receive them by mail – but even then, they cannot be used fully.

Due to sanctions, the cargo turnover in Crimean seaports fell five times – from 11.3 million tons in 2013 to 2.3 million tons in 2020. This is mainly transportation between Crimea and Russia, as well as (less than 10%) grain supplies from Crimea to Syria and other Middle Eastern countries. Russia has not been able to establish a regular sea passenger service with Crimea.

In the energy sector, sanctions are less effective. Due to the cessation of electricity supplies from Ukraine, Russia was forced to spend a lot of resources on the urgent deployment of mobile gas turbine stations to Crimea, laying several lines of an energy bridge from Russian territory and accelerating the construction of two powerful thermal power plants.

Russia’s total losses from sanctions can be determined by different indicators by comparing data for 2013 with later years. In 2013, investments into the capital stock of the Russian Federation amounted to 422 billion U.S. dollars, and in 2020 only 275 billion. Russia’s domestic debt increased from 68 billion to 201 billion U.S. dollars. According to Russia’s State Statistics Service Rosstat, real incomes in Russia decreased by 12% from 2014 to 2020.

The International Monetary Fund estimates Russia's losses from sanctions at 0.2% of GDP annually. However, experts Anders Aslund, a senior fellow at the Atlantic Council, and Maria Snegovaya, a researcher at the Institute for European, Russian, and Eurasian Studies at George Washington University, believe that the cost of sanctions for Russia is much higher – 2.5-3% of GDP annually – and that in total, it has reached several hundred billion U.S. dollars.

Russia is constantly trying to avoid sanctions. In Russia’s military-industrial sector, access to the register of military-industrial complex enterprises and information on purchases made under the State Defense Order of the Russian Federation was closed off.

Russian authorities have also allowed hiding the information in the Unified State Register of Legal Entities pertaining to the companies that currently are or may fall under sanctions of the EU and United States – in particular, those located in occupied Crimea.

Crimean companies use clone companies registered on Russian territory to work safely. In the financial sector, banks are circumventing restrictions by using a system of non-sanctioned correspondent accounts. A sanctioned Crimean bank opens a correspondent account with a "clean" Russian bank. In turn, a foreign bank also opens a correspondent account with the same Russian bank and the Russian bank – with a foreign bank. Thus, a sanctioned Crimean bank can use the services of a "clean" Russian bank both on the territory of the Russian Federation and abroad. This reduces Crimea’s international financial isolation.

Perhaps the most famous case of sanction violations is the supply of Siemens turbines for Russia-built thermal power plants built in occupied Crimea. The turbines were allegedly purchased for the construction of a power plant in Russia's Taman. A similar scheme has been used in other cases: products that are banned from being delivered to Crimea have been sold by Western companies to Russian shell companies, who then supply them to Crimea. This is due to imperfections of the sanctions system.

It is forbidden to sell buses, trucks, and special equipment manufactured by European companies to Crimea. But leasing operations aren’t subject to European sanctions, so a specially created leasing company supplies equipment from Russian and European manufacturers to Crimea under leasing agreements, attracting funds from a sanctioned Crimean bank.

With cars it’s even easier – sanctions don’t forbid these sales to Crimea. But to get a car loan, warranty, and other related services, Crimeans have to apply through companies registered in the Russian Krasnodar Territory.

Franchising is also not subject to sanctions – so European brands make it to Crimea through shell companies registered in Russia. The situation could be somewhat remedied by a clause inserted into contracts, stating that products supplied to the Russian Federation will not then be forwarded to Crimea – and an extension of sanctions to leasing and franchising schemes.

There are such examples. In the United States, the international financial transactions company Payoneer received a 1.5 million-U.S. dollar fine for violating a number of sanctions, including Crimean ones. Amazon.com Inc., the world's largest online retailer, could be fined $1 million for supplying goods and services to residents of Crimea and other sanctioned areas. However, because Amazon reported to the Office of Foreign Assets Control about the violation on its own initiative, the company’s fine equated to half the cost of services provided in violation of sanctions – 134,523 U.S. dollars. In Britain, Standard Chartered Bank was forced to pay 20.5 million pounds for cooperation with a subsidiary bank of Russia’s Sberbank.