Ironically, that day I was just a PhD candidate in a room of prominent professionals, but I was 100% sure that I knew the answer to this question. With research interests in sanctions evasion and, more broadly, third countries’ strategies and choices regarding compliance or circumvention of sanctions, I had no chance of missing the book “Busted Sanctions” by Professor Bryan Early of the University at Albany. And this book has a precise answer to the question. His answer to the eternal question of why sanctions fail – success rate estimates vary from merely 4% (Pape, 1997) to around 35% (Hufbauer et al., 2007, Morgan et al., 2014) – is not only the poor design of sanctions or weak implementation; Early states that there is a significant contribution from third countries and provides substantial supportive evidence to his argument.

Busted Sanctions

Early identifies two major mechanisms of sanctions busting – aid-based and trade-based. Aid-based sanctions busting is driven by ideology or political interests and conducted at the government level, while trade-based sanctions busting is done by individual firms and motivated by their commercial interests, which makes it a core concern for compliance professionals. By analyzing 96 US sanctions episodes in 1950-2002, Early shows that the most likely sanctions busters are firms from countries with large open economies that have pre-existing trade ties to the target of sanctions and are geographically proximate to it.

Two interesting findings deserve more careful consideration. First, the geographical proximity is twofold. On the one hand, the closer the distance to the target of sanctions, the higher the probability of being involved in circumvention. At the same time, countries that share a physical border with a sanctioned state are more likely to circumvent sanctions through illicit trade, making it less traceable to external analysts. In practice, this means that the absence of official connections or transactions with businesses from a sanctions target, and even official country-level data showing no change in sanctioned goods flows, cannot completely eliminate sanctions risk.

The second important finding is that US allies are twice as likely to circumvent US sanctions as other countries. According to Early’s calculations, in 1950-2002, firms from Germany (West Germany in pre-1990), Japan, Italy, France, and the UK were responsible for almost half of US sanctions circumvention episodes. He digs into case studies of Iran-related sanctions busting and shows that US allies such as Australia, Japan, the Netherlands, France, Italy, and Germany saw increases in their exports to Iran in the 1980s and 1990s ranging from twofold to sixfold.

Moreover, Early provides a detailed study of several waves of US sanctions against Iran and the circumvention of these sanctions through the transshipment of sanctioned goods via the port of Dubai. He illustrates that the Defense Cooperation Agreement between the US and UAE, signed in 1994, significantly intensified the re-export of US goods to Iran through Dubai – even based on the official data, ignoring the smuggling of dual-use goods.

Another insightful case study is the Iraqi invasion of Kuwait and consequent UN sanctions. Emirati traders utilized the established networks and smuggling routes to run goods to Iraq via Iranian waters, even as the UAE's federal government was contributing troops to the US-led coalition against Saddam Hussein. After the Gulf War, when enforcement attention faded, the illegal traffic reversed into oil smuggling out of Iraq via Iran to Dubai and Fujairah, with overall flows out of Iran reaching an estimated 10,000 barrels a day by 1994.

Why do closer ties with the US lead to more disruptive behavior when it comes to sanctions? Early argues that one of the important factors is that the alliance with the US actually gives other countries a kind of protection, a shield against US coercive measures, as the reputational costs for the US would be greater than the loss from flawed sanctions. While he bases this conclusion on the UAE case, the same underlying alliance-shield logic could be easily extended to the Iran-Libya Sanctions Act (ILSA) of 1996, which never really triggered any sanctions against European companies – even the $2 billion investment into a gas field by Total SA of France, Gazprom of Russia, and Petronas of Malaysia received a waiver. On top of that, other foreign investments agreed to in Iran’s energy sector were estimated to total $11.5 billion, although penalties were never imposed.

Finally, to protect EU businesses involved in legitimate trade, the EU introduced the Blocking Statute, which prohibited European persons from complying with foreign sanctions and signaled an important first step in the divergence of legislation between the US and EU. In recent years, this trend has intensified: the US withdrew from the JCPOA in 2018, the EU updated the Blocking Statute, and the mismatch in approaches to Russian sanctions leaves firms to navigate multiple legal frameworks.

Helpful insights

• Allied-country origin is not a de-risking factor

• Shared border creates pre-conditions for illicit trade

• Sanctions evasion background is a strong risk indicator and a reason for scrutiny

• Contractual clauses become one of the most crucial sanctions risk controls the company can introduce

• Diverging sanctions legislation and blocking statutes create conflicting legal obligations across jurisdictions, giving rise to a new compliance risk

Sources:

Clawson, Patrick. "Sanctions Relief for Iran Without Congressional Approval." The Washington Institute, n.d. Accessed July 26, 2026. https://www.washingtoninstitute.org/policy-analysis/sanctions-relief-iran-without-congressional-approval.

Early, Bryan R. 2015. Busted Sanctions: Explaining Why Economic Sanctions Fail. Stanford University Press.

Hufbauer, Gary Clyde, Jeffrey J. Schott, Kimberly Ann Elliott, and Barbara Oegg. Economic Sanctions Reconsidered. 3rd ed. Washington, DC: Peterson Institute for International Economics, 2007.

Katzman, Kenneth. "The Iran-Libya Sanctions Act (ILSA)." CRS Report for Congress, Order Code RS20871. Updated August 8, 2006.

Morgan, T. Clifton, Navin Bapat, and Yoshiharu Kobayashi. "Threat and Imposition of Economic Sanctions 1945–2005: Updating the TIES Dataset." Conflict Management and Peace Science 31, no. 5 (2014): 541-558.

Pape, Robert A. 1997. "Why Economic Sanctions Do Not Work." International Security 22, no. 2: 90-136.

Other Central Asian and South Caucasus countries, widely recognized as transshipment hubs, were not directly sanctioned but eventually adjusted their re-export practices to align more closely with Western sanctions. Georgia, which shares a border with Russia, was actively involved in the re-export of luxury cars from the US and the EU to Russia in 2022-2023, after the G7 and the EU imposed a ban on their supply to Russia. In the summer of 2023, shortly after the EU introduced the 11th sanctions package, Georgia banned the re-export of cars to Russia. According to Georgian official data, it led to a dramatic drop in car sales to Russia – from 1,054 in July to 85 in August, 26 in September, and to almost zero afterward.

Did Western cars stop reaching Russian customers? Not really. Sanctions evaders employed several ways to avoid scrutiny by Georgian and Western authorities. The first was a “grey” channel which was discovered by a Georgian journalist Ia Asatiani. She found that cars imported from the US and the EU were transported to the Georgia-Russian border without any registration and then transferred directly across the border without customs clearance.

Another channel, analyzed by Vakhtang Partsvaniya and Erekle Pirveli from Caucasus University in Georgia, is not “grey” in the common sense, as it involves the legitimate export of cars to Armenia, Kazakhstan, and Kyrgyzstan – members of the Eurasian Economic Union (EAEU) along with Russia. Like the EU, it establishes a customs union, meaning goods face customs controls only at the outer border and can move freely between countries afterward, making it a perfect route for sanctions evasion. Borrowing techniques from money launderers, sanctions evaders continue supplying cars to Russia, layering them through “fourth” countries.

Before digging into the data and Partsvaniya and Pirveli analysis, a quick note on the geographical rationale for Georgia to be the first point of Western cars’ entrance to the region. Being the most Western country in Central Asia and the South Caucasus, Georgia is the only state with access to the Black Sea, while other countries are either landlocked or have ports only on the Caspian Sea, which is technically a lake and doesn’t have access to an open ocean. For car shipments, Georgia naturally became the transshipment hub for other countries in the region long before the West implemented sanctions against Russia. However, since 2022, this trend has intensified significantly, raising reasonable suspicions about its business rationale.

Indeed, while sales to Russia dropped tenfold within the first month after the Georgian ban on car re-export to Russia, supplies to Kazakhstan and Kyrgyzstan expanded from 4,917 in July to 6,047 in August and to 6,900-7,000 in September-October 2023. In 2024-2025, the average export of cars to Kazakhstan and Kyrgyzstan was more than 7,000 cars per month – almost 10 times higher than in any other year before 2022, as shown in Figure 1.

Figure 1. Georgian exports of cars (volume)

Source: National Statistics Office of Georgia

In dollar equivalent, the change is even more impressive. Average monthly exports from Georgia to Kazakhstan and Kyrgyzstan in 2024-2025 exceeded 170 million USD, reflecting more than a 30-fold increase over the pre-2022 period (see Figure 2 below). Surprisingly, Kyrgyzstan appeared to focus on much more expensive cars – if in 2021-2022 the average price of cars exported from Georgia to Kyrgyzstan was about 0.7 of those going to Kazakhstan ($8.3k vs $12.3k), in 2025-2026 this ratio grew above 2.1 ($36.6k vs $17k).

Figure 2. Georgian exports of cars (value)

Source: National Statistics Office of Georgia

Could it be that the demand for cars in Central Asia grew significantly in recent years due to factors unrelated to anti-Russian sanctions – for instance, economic development, partially stimulated by Russian migration in 2022? Not impossible. Partsvaniya and Pirveli test the impact of anti-Russian sanctions on Georgian car exports to the EAEU, controlling for the influence of changes in GDP, inflation rate, and currency exchange rate to account for various mechanisms that can explain demand fluctuations. They find that EAEU members have increased their car imports from Georgia much more than from other Georgia trade partners. An interesting finding outlined by Partsvaniya and Pirveli is that this impact is especially significant in USD terms, relative to volume. They argue that this outcome reflects the elevated logistics and transportation costs associated with rerouting cars through several countries, leaving only luxury-car consumers able to bear them.

Helpful insights

• Actual end-user verification is indispensable – just another reminder of what has been known to AML professionals long ago

• “No Russia” clause – a contractual commitment barring re-export to Russia or re-export-adjacent use – is essential when trading with EAEU

• Trade bloc membership with a sanctioned country or other form of customs relief is a red flag requiring elevated scrutiny

• Surging per-unit cost of what has been a regular trade activity, especially when it doesn’t match other trade directions’ dynamics, must be treated as suspicious

Sources:

Council of the European Union. Council Regulation (EU) No 833/2014 of 31 July 2014 Concerning Restrictive Measures in View of Russia's Actions Destabilising the Situation in Ukraine. Consolidated text, July 24, 2026. OJ L 229, 31.7.2014, p. 1. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02014R0833-20260724.

Asatiani, Ia. “Russia’s ‘Auto Heaven.’” iFact. February 13, 2024. https://ifact.ge/en/sanctioned-cars/

National Statistics Office of Georgia. “National Statistics Office of Georgia.” Accessed July 14, 2026. https://www.geostat.ge/en

Partsvaniya, Vakhtang, and Erekle Pirveli. “Western Sanctions Evasion through Third Countries: The Case of Sanctioned Cars Re-export to Russia.” NISPAcee Journal of Public Administration and Policy 17, no. 2 (Winter 2024/2025): 80–108. https://reference-global.com/article/10.2478/nispa-2024-0014