The German and French makers of luxury cars are lobbying the EU to prevent sanctions on exports of their products to Belarus, which eventually end up in Russia, Politico reported on June 6.

Rich Russians love flashy cars and owning a Mercedes or an Audi is a major status symbol. European Original Equipment Manufacturers (OEMs) pulled out of the lucrative Russian market following the invasion of Ukraine two years ago, but their cars are still widely available in Moscow, many of which are being imported via Belarus.

Despite sanctions imposed on Minsk following Belarus President Alexander Lukashenko’s crackdown following the mass protest sparked by a massively falsified presidential elections in 2020, European companies can still export their cars to Belarus, which is in a customs union with Russia.

While the carmakers are nominally on board with the sanctions, in practice they continue to make healthy profits from selling top of the line car models to Russia, which are legally transiting Belarus on their way to Russia.

Exports of EU cars to Belarus surged four-fold in 2023 to $2.6bn, according to German trade statistics. The volume of exports of luxury cars to Belarus has risen even more dramatically, accounting for two-thirds of the total increase in trade, worth $1.4bn.

The EU is currently discussing imposing a fourteenth sanctions package on Russia, but in parallel is discussing tightening sanctions on Belarus as it attempts to close down loopholes that allow Western goods to bypass the sanctions regime.

German opposition has stalled European Union efforts to close the Belarusian loophole, Politico reports citing four EU diplomats. France is not supporting the proposed measures either, three diplomats confirmed to Politico.

In the current discussion on the new sanctions, new sanctions on Belarus are included in the same package, but due to the car sector lobby pressure, MEPs are now toying with the idea of separating out the Belarusian sanctions into its own bill that will be considered later so that the next round of sanctions on Russia can be passed more easily. The EU hopes to have the new package of sanctions on Russia ready in time for the G7 summit in Italy due next week.

“If we take weak measures on Belarus while we know that goods arrive in Moscow via Minsk, it’s a bit ridiculous,” one EU diplomat told Politico, speaking on condition of anonymity.

A French diplomat stated that Paris supports “strong sanctions against countries that circumvent sanctions,” but emphasised focusing on goods that serve the Russian war effort. Similarly, a German diplomat noted that “Germany supports strong measures against sanctions circumvention, but that the focus should be on goods that are relevant to the Russian war of aggression.”

While the EU has been resolute on imposing extreme sanctions on Russia to run down its ability to continue the war in Ukraine, as bne IntelliNews has reported, the entire sanctions regime is riddled with exemptions and calve-outs as the EU attempts to minimise the economic pain of cutting off its main supplier of energy and raw materials. At the same time, many of Europe’s leading companies are still doing business in Russia, by far the largest consumer market in Europe. Only 9% of foreign companies have left the Russian market, and many of those continue to sell their goods in Russia, importing them via traders in third countries such as Belarus and Turkey.

The failure to effectively enforce the current sanctions regime has meant that Russia’s economy continues to grow strongly, according to the latest Central Bank of Russia (CBR) monthly macroeconomic survey, and the shops are as full of Western-made goods as they were before the war.

Russian car production came to a screeching halt shortly after the war began, as international carmakers in Russia were heavily dependent on “just in time” imports of car parts made in Europe. The automotive sector was probably the worst hit by the end of the trade with Europe, and production came to an almost complete standstill.

Since then the car market has bounced back as those factories has been taken over by Russian firms or investors from friendly countries. China in particular has stepped into the large hole created in the Russian automotive sector and sales have recovered almost all of the ground lost in 2022.

Sales of new cars and light commercial vehicles (LCV) in Russia amounted to 132,400 with parallel import consideration, the Association of European Businesses (AEB) said. (chart)

"According to the AEB Automobile Manufacturers Committee, total sales of new passenger cars and light commercial vehicles in May 2024 amounted to 125,501 units excluding alternative supply channels, and about 132,363 units including them. This is confirmed by sales data from PPC: 132,523 units," AEB informed, an increase 132.4% compared to the same month in 2023.

"In May 2024, the Russian automobile market continued its rapid growth by 72.5% compared to May last year. At the same time, if we look at the dynamics, we see that March 2024 exceeded the sales figure for the corresponding month of last year by 102%, [and] April by 78%," chairman of the Automobile Manufacturers Committee Alexey Kalitsev said.

Russia is on course to sell over 1mn cars this year and get back to pre-war car sales volumes in 2025.