The problem of parallel trade in Kazakhstan – The Diplomat

Ever since Russia invaded Ukraine, Western countries have used sanctions as a primary means of punishing Moscow in an effort to cut off the flow of critical technology to the Russian defense industry. The current geopolitical situation has opened detours and indirect trade routes through which dual-use goods from the West can enter Russia. Kazakhstan is the main importer of dual-use goods from the West and the upward trend we are seeing is that these goods are then resold to Russia.

From January to October 2022, Kazakh companies exported electronics and mobile phones to Russia for more than $575 million, 18 times more than the same period in 2021.. At the same time, in 2022, Russia remained the largest trading partner of Kazakhstan, according to the Bureau of National Statistics (BNS) of Kazakhstan. This is the part broader trend secret sales to Russia through third party channels in neighboring or friendly countries, and Kazakhstan is one of them.

This indirect trade route is not a new phenomenon, but a well-studied phenomenon that emerged during the Cold War era with the imposition of trade embargoes. Bypassing and searching for alternative routes is a well-established practice in Russia. Given this, it is not surprising that these sanctions evasion schemes now showing up more on our radar and that Kazakhstan has become a popular choice for Russian manufacturers to access export-controlled goods.

According to the latest EBRD reportexports from the EU, UK and US to Kazakhstan increased by more than 80 percent in 2022. At the same time, Kazakhstan increased its exports to Russia by more than 22 percent. This tells us about a significant increase in intermediary trade, when goods are exported to Kazakhstan and then sold to Russia.

Previous research the reports emphasize that Russian weaponry relies heavily on specialized components produced abroad. These components can be divided into two categories. The first is intermediate goods, that is, parts and components that are used to make final consumer goods, such as electronics, microchips, toasters, and medical equipment. The second category is capital goods, that is, machinery and equipment that is used to produce other things, such as nuclear and engineering equipment.

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Both fall under the category of dual-use goods, i.e. goods with legitimate civilian and military uses. The many usefulnesses of these commodities have made them fuzzy and difficult to control. Thus, it is not always easy to determine whether a product is a weapon or a civilian, and therefore each product must be considered separately.

Key challenges for Western exporter and Kazakh reseller

The presence of prohibited trade flows from the West to Russia through Kazakhstan has triggered a new wave of export controls and sanctions to block the sale of critical goods to Russia. 24 February, the US, the EU and the UK have announced a new package of sanctions against individuals and companies helping Russia evade sanctions. Ukraine’s Western allies also warned of “serious costs” for countries helping Russia evade sanctions. The precedent for this was set in June 2022when the US imposed secondary sanctions on an Uzbek company exporting electrical components to Russia.

In most cases, exposure to sanctions risks up and down the supply chain may be less obvious. These supply chain implications of the Russian-Ukrainian conflict have forced many Western companies to reconsider their exposure to sanctions risk. So for the Western exporter, the key issue now is trust. The recent rise in parallel trading has raised awareness of Russia’s banned practice of trading in dual-use goods. Russia legalized parallel imports last yearand there is no special legislation against parallel trade in Kazakhstan yet.

It is important to remember that sanctions evasion can occur at any stage of a trade transaction between an exporter and a seller. This complicates the management of potential risks across distribution channels, from sourcing materials and selling goods to cities and ports along the shipping route and transit ships themselves. For Western exporters, there is a high risk that their products will inadvertently end up in the Russian military and defense industries, and the risk of sanctions will also be high.

These secret sales to Russia will not stop anytime soon. Equally, the logistical difficulties and high prices along these indirect trade routes are not sustainable in the long run for intermediate traders. So, in the meantime, these well-established methods of evading sanctions must be understood and anticipated before we can mitigate their effects.

For the Kazakh reseller, the main risk they may face is secondary sanctions. Last year, President Kassym-Jomart Tokayev repeatedly gave assurances that Kazakhstan will comply with Western sanctions; and that any trade interaction with Russia will be subject to the sanctions framework. This can be a difficult task for Kazakhstan for several reasons.

Historically, Kazakhstan and Russia have been longtime trading partners as they share the largest border and are members of the Eurasian Economic Union (EAEU), a free trade area along with Belarus. In addition, the routes used by local carriers prefer the northern route to Europe, which passes through Russia, as it is shorter and cheaper.

For context, the transport infrastructure of Kazakhstan and Central Asia as a whole has been heavily influenced by the needs of the former Soviet Union. In this regard, road and rail links were designed to facilitate traffic flows to the center of Russia in Moscow. Thus, this northern network through Russia is more developed than links to Kazakhstan’s eastern and southern neighbors. In addition, Kazakhstan’s membership in the EAEU has increased the attractiveness of the northern route for exports and business.

A lot of Kazakhstan traders are thriving under these sanctions thanks to the growing demand for cars, phones and other technology, which they resell to Russia. This can also be seen in the export of oil and coal. In accordance with Kommersant, a Russian-language news channel, with Kazakhstan replacing Russian coal in Europe, the country increased its own coal exports via Russia in 2022 by 11 percent. Thus, the relationship of Kazakhstan with Russia in economic, geographical and political terms is not new, but it should be understood and considered in context.

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Closing the back door from the sale of dual-use goods to Russia is no easy task. Given that we live in an integrated economy and that global supply chains are made up of complex networks, you cannot punish every member of the network to solve this problem. What we can do is try to mitigate the risks that may arise at various stages of a trade transaction. To do this, we must first understand how these supply chains work.

In the context of Kazakhstan, many variables make it a high-risk destination for parallel trade with Russia, the main ones being geography, economics, history and politics. The economies of Kazakhstan and Russia have historically been closely linked. While rhetorically Kazakhstan can assure the West that it will put regulatory pressure on the resale of critical goods to Russia, from an economic perspective, things are not so clear cut.

At the same time, this problem presents several opportunities for Kazakhstan and enterprises that are to some extent connected with the country. A possible advantage for Kazakhstan could be a greater willingness to diversify its trade routes. For Western exporters of dual-use goods, the benefit would be to strengthen supply chain management and rethink best practices.

It will take some time for supply chains to recover, and these prohibited trading practices will not disappear overnight. With that in mind, business as usual is no longer an option.