In recent months, growing tensions between Washington and Moscow as well as intensified attacks in Ukraine have raised questions over the role of Russia’s neighbours, particularly Kazakhstan. In Washington and Europe, leaders are now considering the potential for secondary sanctions on countries found to be helping Russia obtain prohibited goods.
In looking to achieve these goals, EU lawmakers have already passed legislation for an 11th sanctions package that would mandate sanctions on companies and individuals in third countries that are found to be helping Russia circumvent sanctions. The countries of Central Asia, in particular Kazakhstan, have been named by EU officials as possible targets of this package.
According to a recent report by the European Bank for Reconstruction and Development (EBRD) exports from the EU, U.K., and U.S. to Kazakhstan increased by more than 80 percent in 2022 while, during the same period, Kazakhstan increased its exports to Russia by more than 22 percent. A recent investigation released by OCCRP (the Organized Crime and Corruption Reporting Project), together with Important Stories (Russia), Der Spiegel (Germany), and Vlast (Kazakhstan) revealed that Kazakhstan has become a transit point for the import of electronic components and other dual-use goods to Russia, which are then used by the Russian army and defense enterprises.
The Kazakhstan-Russia relationship is shaped to a large extent by geography and history. A shared Soviet and (partly) Tsarist past, has created deep social, infrastructural, and business links between the two countries. Their long border ensures that Kazakhstan and Russia are tightly interdependent in security terms, too. Kazakhstan is one of Russia’s most active trading partners and a member of the Eurasian Economic Union (EAEU), a Moscow-led trading bloc dominated by Russia that also includes Belarus, Armenia, and Kyrgyzstan. Kazakhstan’s primary source of revenue comes from its oil and gas industry, which remains highly dependent on Russia as an exporting and refining route; 80 percent of Kazakhstan’s crude oil exports is transported to Russia’s Novorossiysk-2 marine terminal on the Black Sea to be refined and processed.
Magzum Mirzagaliyev, chairman of Kazakhstan’s national oil and gas company KazMunayGaz, held talks with David Reed, director for sanctions at the U.K. Foreign, Commonwealth and Development Office, in London on June 12. The key point discussed was the need to prevent the economic fallout of Western sanctions from impacting Kazakh oil exports through Russia.
Kazakhstan is also a member of the Russian-led Collective Security Treaty Organization (CSTO), from which Tokayev requested support amid the January 2022 protests. Domestic political aspects also matter for the type of relations that the two countries enjoy. In this respect, two issues are especially relevant: Kazakhstan’s large ethnic Russian minority and similarities in regime type.
For Kazakhstan, the secondary sanctions risk is not just hypothetical. A precedent was set in June 2022, when the United States imposed secondary sanctions on an Uzbek company involved in exporting electrical components to Russia. In light of this and considering a recent increase in enforcement actions by U.S., EU, and U.K. authorities relating to the Russia-related sanctions more generally, there is a possibility of cases being initiated against persons, banks, and companies based in Kazakhstan.
The official narrative in Astana may give the impression that Kazakhstan is taking the West’s sanctions concerns seriously and taking responsibility for how goods transported through its territory are used. As part of this broader framing effort, Kazakhstan introduced a new tracking system that supposedly would allow real-time tracking of the entire chain of movement of goods from border to border. Tokayev and his diplomats have also spoken of Kazakhstan’s neutrality with greater urgency in recent months. In comments during the EAEU forum in Moscow, Tokayev made a point of stressing that the “EAEU is an exclusively economic and not a political vehicle.” Afterward, Tokayev’s press secretary, Ruslan Zheldibay, stated that “Kazakhstan does not intend to or plan to join any allied state.”
Yet this tells only half the story. The bigger picture shows that Tokayev’s personal guarantees, no matter how sincere, have not helped fully stop the re-sale of dual-use goods to Russia. This trade continues to intensify and in reality, there appears to be a lack of dedicated effort by the Kazakh authorities to combat the issue of parallel trade through its territory. A case in point is that Kazakh banks continue to issue Kazakh individual identification numbers (IIN) to Russian nationals without them actually needing to be in the country in person. This IIN gives its holder the opportunity to do business and engage in trade in the country. According to the Kazakh government, the total number of Russian taxpayers registered in Kazakhstan last year was around 70,000; today it is estimated between 300,000 to 1 million. However given the lack of transparency of data, this statistic could be much higher. Many small businesses in Kazakhstan have also made strong profits off the sanctions on Russia by sourcing goods that Russian companies are unable to obtain directly.
Secondary sanctions are a fairly new mechanism established by the United States in the last five years or so, particularly relating to Iran. These types of sanctions as Jack Lew, the former U.S. treasury secretary, said in 2016, “generally [are directed] towards foreign persons. These measures threaten to cut off foreign individuals or companies from the U.S. financial system if they engage in certain conduct with a sanctioned entity, even if none of that activity touches the U.S. directly.” As noted in Bloomberg, “the imposition of secondary sanctions is meant to force companies, banks, and individuals to make a tough choice: continue doing business with the sanctioned entity or with the U.S., but not both.” Because of the dominance of the U.S. dollar as a store of value in the global economy, most companies prioritize keeping good relations with the United States.
The purpose of a round of secondary sanctions would be to attempt to pressure Kazakh officials to push internally for a change in policy. The U.S. and until recently, the EU, are the two main actors that have a secondary sanctions policy in place. In June, the EU’s 11th sanctions package was passed with a focus on combating the circumvention of pre-existing trade sanctions rather than introducing new bans. It is important to note that the U.S. and EU secondary sanctions aim to target companies, banks, and individuals (rather than countries) that are suspected of undermining the effectiveness of sanctions. Still, it remains unclear whether secondary sanctions on Kazakhstan’s businesses, banks, and individuals suspected of helping Russia would compel a change in policy. Business leaders arguably have the most to lose, since disruptions in trade and investment with Western partners will affect businesses first and foremost.
Given the depth of economic ties between Astana and Moscow, secondary sanctions against businesses, individuals, and banks in Kazakhstan could be highly costly for their economy. With only mixed Kazakh support, closing the loopholes could be difficult to achieve. Western policymakers need to focus on areas where Russia is asymmetrically dependent on foreign goods, technology, and finance that come through Kazakhstan. If secondary sanctions were to be implemented, Western leaders would need to ensure that credible threats are matched with credible assurances. With the U.S. and the EU announcing a shift of their gaze to Kazakhstan and Central Asia more broadly, these developments will also be closely observed by Russia.
Against this backdrop, Astana doesn’t see the choice in front of it as a binary one, and wants to avoid becoming a piece on the proverbial geopolitical chessboard pushed around by larger powers. Instead, Kazakhstan seeks to maintain positive relationships with two behemoths — a balancing act, for sure, but a manageable and necessary one from their point of view.
This article was first published in The Diplomat.