Could Russia and Vietnam's Energy Profits Shield Them from US Sanctions?

Recent revelations indicate that Russia and Vietnam have established a covert mechanism for concealing arms deal payments, circumventing Western sanctions. By leveraging profits from joint oil and gas ventures, Vietnam has been able to finance military purchases from Russia without engaging in direct cash transfers through international banking systems.

Last updated: 25 October 2023 (BST)

Key Takeaways

• Vietnam is using profits from a joint oil venture with Russia to finance military purchases.
• The arrangement avoids traditional banking routes, thereby skirting international sanctions.
• The U.S. government has expressed concerns over Vietnam's military ties with Russia.
• This strategy highlights Vietnam's balancing act between Russia and the United States amid geopolitical tensions.
• Vietnam's military capabilities are on the rise, primarily aimed at countering Chinese influence in Southeast Asia.

The Mechanism Behind the Payments

Internal Vietnamese documents have unveiled a sophisticated system where Vietnam finances its military purchases from Russia using profits from a joint oil venture in Siberia, known as Rusvietpetro. This arrangement allows Vietnam to repay loans for military acquisitions—such as fighter jets and tanks—while avoiding the scrutiny of international financial systems controlled by the West.

The process is structured as follows:

1. Vietnam's profits from the Rusvietpetro venture are sent to Moscow to repay military credits.
2. Any remaining profits are transferred to the Russian state-owned company Zarubezhneft.
3. Zarubezhneft then uses its joint venture in Vietnam to pay an equivalent amount to Vietnam's oil and gas group, effectively keeping the money within the two countries.

This method is particularly appealing given the heightened sanctions against Russia following its invasion of Ukraine. The U.S. and its allies have targeted Russian financial transactions, aiming to limit the Kremlin's ability to fund its military operations. By avoiding the global SWIFT network, Vietnam and Russia have created a financially discreet loop that circumvents these barriers.

Context of the Relationship

The strategic relationship between Vietnam and Russia has historical roots, with Vietnam relying on Russian military support for decades. Despite Vietnam's growing ties with the U.S., particularly since the lifting of the arms embargo in 2016, the country continues to depend on Russian arms for its military capabilities. Recent contracts indicate that Vietnam is not retreating from its partnership with Moscow, even amidst pressure from Washington.

In 2011, Vietnam secured $2 billion in credit from Russia for military acquisitions, including frigates and tanks. A more recent agreement in 2023 involved an additional $8 billion for fighter jets and other equipment. However, delivery of these items has yet to materialise, raising concerns about the reliability of Russian commitments.

The Geopolitical Landscape

As Vietnam continues to strengthen its military, it finds itself in a complex geopolitical environment. China, its largest trading partner, poses a growing threat, particularly over territorial disputes in the South China Sea. The U.S. views Vietnam as a strategic ally in countering Chinese assertiveness, which adds a layer of complexity to its military engagements with Russia.

The U.S. has expressed concerns about Vietnam's military dealings with Russia, warning that continued purchases could lead to sanctions under the Countering America’s Adversaries Through Sanctions Act (CAATSA). This act allows the U.S. to impose penalties on countries engaging with Russia's military-industrial complex. Despite this, internal discussions within Vietnam suggest that the government believes it can navigate these pressures by highlighting its strategic importance to the U.S.

Implications of the Arrangement

The implications of this covert payment mechanism are significant. By avoiding traditional financial channels, Vietnam reduces its exposure to potential sanctions while maintaining access to Russian military technology. This arrangement also reflects Vietnam’s ongoing military modernisation efforts, which are crucial for its national defence strategy.

Experts suggest that this payment method is not merely a workaround but a reflection of a deeper strategic alignment between Vietnam and Russia, indicating that both nations are willing to engage in unconventional practices to preserve their interests despite external pressures.

The Future of Vietnam-Russia Relations

Looking ahead, the sustainability of this arrangement will depend on how external pressures evolve. As sanctions against Russia intensify, it remains to be seen how Vietnam will balance its ties with both Moscow and Washington. The situation is fluid, and Vietnam's leadership must navigate a diplomatic landscape where being too closely aligned with Russia could jeopardise its burgeoning relationship with the U.S.

As both nations continue to solidify their partnership, particularly in military and energy sectors, the effectiveness of this backdoor payment mechanism will be crucial in determining the future trajectory of their relationship.

FAQs

What is the mechanism used by Vietnam and Russia for arms payments?

Vietnam uses profits from its joint oil venture with Russia to repay military loans, avoiding traditional banking routes and international sanctions.

Why is this arrangement significant?

This mechanism allows Vietnam to continue acquiring military equipment from Russia while circumventing potential sanctions imposed by the U.S. and its allies.

How does this affect Vietnam's relationship with the U.S.?

While Vietnam seeks to strengthen ties with the U.S. as a strategic partner, its ongoing military dealings with Russia may create tension and lead to potential sanctions.

What are the potential risks involved in this payment scheme?

The primary risk lies in the possibility of secondary sanctions being imposed on Vietnam, which could impact its economy and international relationships.

How has the international community reacted to this arrangement?

The U.S. and European Union have expressed concerns about the implications of Vietnam's military transactions with Russia, particularly in light of ongoing geopolitical tensions.