Developing Bad Habits: What Russia Might Learn from Iran’s Sanctions Evasion

It can be expected that Russia will seek to establish parallel financial relations that aim to evade the sanctions set against it by Ukraine’s allies.

As Western nations and their allies across the globe impose a growing raft of sanctions on the Russian economy, evidence is emerging of adaptations in Russia’s financial and trade strategy. Examples include the switching of ownership of companies and properties to family members or affiliates, the use of trading companies to source foreign exchange to avoid the sanctions imposed on the Central Bank of Russia, and import substitution, which the country has adopted since it was first targeted by Western sanctions in 2014. Alongside these steps, Russia is now gravitating further towards other states that have faced similarly sweeping restrictive measures or that facilitate sanctions evasion, to learn best practice, secure necessary services and establish trade relationships.

By highlighting the experience of other rogue states, this paper examines the question of how Western governments, notably in Europe, and their private sectors could strengthen their sanctions implementation and enforcement strategies in light of potential changes in Russia’s financial activity. In particular, the paper considers techniques that Russia might learn from rogue states to create a similar – or interconnected – parallel financial system.

In this regard, Iran represents a notable case study. The country has faced financial sanctions from the international community for years, seeks to fund its economy through the export of hydrocarbons, and has most recently had to adapt to the reimposition of sanctions by the US, following former US president Donald Trump’s withdrawal from the 2015 nuclear deal (the Joint Comprehensive Plan of Action), under which Iran originally received certain UN, unilateral and national sanctions reliefs related to its nuclear programme.

Iran also demonstrates the kinds of symbiotic relationships (or mutually beneficial commercial partnerships) between rogue states and non-state actors (including designated terrorist groups) that can benefit from the move to clandestine finance systems. For example, Iran’s funding and resourcing of Hizbullah is reciprocated in numerous ways, including through support for the state’s intermediary oil trading schemes. Such joint ventures or marriages of convenience between rogue states and their proxies may possibly be mirrored in the ways in which private military companies patronised by Russia advance Russian interests (and enable the circumvention of sanctions) globally.

To facilitate its trade and finance ambitions, Iran also co-opts service providing states, such as financial centres, where supervision and enforcement of financial crime regulations is weak.

While evidence has yet to emerge of the complete adaptation of the financial systems needed by Russia to run its economy in defiance of allied sanctions, given the likely prolonged isolation of Russia from the international financial system, similar to Iran, it can be expected that it will seek to establish parallel financial relations that seek to evade the sanctions set against it by Ukraine’s allies.