Incomplete Exit: Central and Eastern Europe’s Corporate Decoupling From Russia

Summary

Following the full-scale invasion of Ukraine in 2022, companies from Central and Eastern Europe (CEE) initially were trailblazers in voluntarily withdrawing from Russia, effectively self-sanctioning through voluntary overcompliance with sanctions by leaving, even though operating in the country is still legal. At the same time, CEE countries have enabled sanctions-evasion networks. The historical economic relationship between CEE countries and Russia created the conditions for this paradox. Decades of relying on Russian energy sources masked an asymmetric interdependence: Russia’s military-industrial complex relied heavily on CEE countries for the machine tools, industrial components, and dual-use technologies essential to weapons production. When EU sanctions targeted these critical supply chains, the geographic proximity and established trade relationships that motivated voluntary exit by some companies also enabled systematic sanctions circumvention by others.

The EU’s Russia sanctions since 2014 have struggled to match the complexity of the economic networks involved. Early sanctions focused on financial restrictions and high-profile sectors but failed to address the technical vulnerabilities that enable large-scale evasion. Even as restrictions expanded to cover dual-use goods and Russia’s “shadow fleet”, fundamental gaps in classification systems and enforcement mechanisms persisted.

The responses of CEE companies have varied across sectors and countries. While investor and consumer pressure drove rapid voluntary exits from Russia in consumer-facing industries, industrial manufacturers found numerous ways to keep supplying it through third-country intermediaries. The behavior of energy companies has reflected the strategic priorities of CEE governments, with some achieving complete diversification from Russia while others reinforced existing dependencies. The variety of corporate responses mirrored the uneven development of national sanctions-enforcement capabilities, ranging from understaffed sanctions departments to insufficiently robust regulatory frameworks; for example, regarding criminalization of violations.

The persistence of sanctions evasion through CEE countries reflects systemic failures in the EU’s enforcement architecture. Technical classification systems designed for traditional trade cannot adequately distinguish between civilian and military applications of modern dual-use technologies. Customs officials lack access to the information systems necessary to verify complex ownership structures and end-use destinations. Legal frameworks optimized for territorial jurisdiction are inadequate for regulating globalized supply chains where goods, payments, and corporate structures span multiple jurisdictions.

Banking institutions operating across Central and Eastern Europe have become critical actors, with a small number of financial institutions handling substantial portions of Russia’s foreign currency transactions. Their continued operations highlight the limits of EU territorial sanctions, which is confirmed by the extent to which US extraterritorial enforcement has become necessary to police sanctions violations in Europe.

Addressing these challenges requires comprehensive reforms across multiple dimensions. Technical improvements must include supplementary classification systems that incorporate detailed specifications for dual-use goods, while institutional capacity-building demands substantial increases in staffing and expertise at the national and EU levels. Financial-sector monitoring needs real-time automated screening capabilities and dedicated compliance structures, while industrial-sector oversight requires specialized task forces with technical expertise in dual-use technologies.

Michal Wyrebkowski is a ReThink.CEE Fellow 2023 of the German Marshall Fund of the United States.