Sanctions on Russia Hurt Neighbor So Much It Won’t Always Comply

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(Bloomberg) — Kazakhstan is drawing a new line in its enforcement of sanctions targeting Russia, vowing to put its own economic interests first as it also deepens trade ties with countries from Iran to China.

The Central Asian nation “won’t blindly follow the sanctions” if they affect domestic companies that function as the main employers in their areas, according to Serik Zhumangarin, Kazakhstan’s deputy prime minister and its minister of trade and integration.

“We will not allow our own producers to be banned from trade,” he said in an interview in the Kazakh capital, Astana.

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It’s a stark shift in rhetoric that reflects the maneuvering by Kazakhstan — the world’s biggest landlocked country — in seeking out access to global markets for its exports of commodities and farm goods. But challenges are only intensifying with the nearby economies of Russia and Iran becoming the most-sanctioned globally and Kazakhstan under scrutiny from the West for facilitating shipments of restricted goods.

Although Kazakhstan has opposed the US-led campaign of sanctions over the Kremlin’s full-scale invasion of Ukraine in February 2022, senior officials like Zhumangarin didn’t previously challenge the curbs in public.

Kazakhstan hasn’t joined a ban on selling ball bearings — which have a dual military and civilian use — since a local plant produces them to a specification that’s traditionally used only in eastern Europe and former Soviet countries, according to Zhumangarin. Western governments say ball bearings are among so-called “high priority” battlefield goods necessary for Russia’s defense industry.

Sanctions Threat

While hinting that Kazakhstan compliance may have exceptions, Zhumangarin made clear it will still continue to abide by the rules because it “won’t withstand” being targeted by sanctions.

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The local companies added by the US Treasury Department to its sanctions list are in the process of being shut down, Zhumangarin said, without being more specific.

Kazakhstan is among countries that have been central to efforts by the US and its allies to isolate Russia’s economy. Kazakhstan and Russia are members of a customs union and share the world’s second-longest border after the US-Canada frontier, with a pipeline linked to the Russian port of Novorossiysk transporting about 80% of Kazakh oil exports.

But Zhumangarin said that some of the measures intended to choke off Russia’s access to goods have disproportionately hurt Kazakhstan instead. Western governments have meanwhile done little to compensate Kazakhstan, which counted Russia as its largest trade partner until the war.

A case in point is Eurasian Resources Group, 40% owned by the Kazakh state, which is suffering huge losses after sanctions blocked its sales of iron ore pellets to Russia, according to Zhumangarin. By contrast, its former biggest customer there switched to domestic suppliers and prospered along with other Russian steelmakers.

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Who Benefits?

In the absence of the restrictions, “the profit would stay in Kazakhstan,” he said. Instead, now it “goes to those who you introduced sanctions against.”

Some of Kazakhstan’s restrictions on imports are so prohibitive that a multinational has struggled to bring in the necessary equipment and receive licensing, prompting it to consider moving its regional distribution center to another country, according to Zhumangarin.

The shift in trade flows around Kazakhstan has largely benefited China. It’s now Kazakhstan’s biggest single trade partner with a share exceeding a fifth of the total. The European Union as a whole accounted for 36% in the first half of this year.

By contrast, Russia made up 18% of overall trade in the first six months of 2024, nearly a percentage point and a half less than in 2022. At the same time, Kazakhstan has emerged as one of the biggest transshipment hubs for EU car exports to Russia, according to Bloomberg Economics.

Kazakhstan has largely overcome payment issues with Russia, working with non-sanctioned banks and settling some 88% of transactions in national currencies, according to Zhumangarin.

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Balancing Act

Now the challenge for Kazakhstan is how to balance the competing priorities of breaking isolation without running afoul of restrictions that target its neighbors.

Sanctions complicate the logistics of trade with Europe, forcing Kazakhstan to make a detour via the Caspian and then through Georgia, Zhumangarin said. Shipments through Russia are no longer viable because its ports are snarled by domestic cargoes.

Many of Kazakhstan’s biggest ambitions center on China, with a plan to double the number of dry ports linking the countries to four. Logistics are the only constraint on trade with its neighbor to the east, Zhumangarin said.

Cut off from ocean access, Kazakhstan is looking to create more resilient trade pathways by exploring a route south through the Caspian Sea to Iran, according to Zhumangarin. The difficulty there is that many of the existing curbs cover items with dual use for defense and energy industries, he said. 

The government has appealed to the West for concessions that would enable it to sell goods to Iran or use the country for transit — but to no avail. Kazakhstan has never recognized any unilateral sanctions and plans to press ahead, Zhumangarin said.

“Every time, we are forced to bargain,” he said. “But as a country, we need to live somehow.”

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