Russia sanctions-busting? Big questions remain over UK car exports
The extraordinary, unprecedented and largely unexplained flows of millions of pounds of British luxury cars into states neighbouring Russia continued in February, according to new official data.
Some £26m worth of British cars were exported to Azerbaijan in February, according to data from HM Revenue & Customs.
The numbers show that in the latest quarter this former Soviet state with developing economy status was the 17th biggest destination for UK cars, bigger than long-established export markets such as Ireland, Portugal and Qatar.
Azerbaijan’s ascent has coincided almost to the month with the imposition of sanctions on the export of cars to Russia.
British cars are banned from being sent into Russia, both as “dual use” goods, which could be repurposed as weapons, and, for any cars over the value of £42,000, under specific luxury goods restrictions.
However, even as UK car exports to Russia plummeted to zero, they have risen sharply to states neighbouring Russia, including Kazakhstan, Kyrgyzstan, Georgia and, most notably of all, Azerbaijan.
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While it is impossible to prove where those shipments end up eventually, there is plentiful anecdotal evidence that these countries are being used as conduits to smuggle banned goods to Russia.
The latest HMRC data shows that in the three months to February, the average value of the cars being sent to Azerbaijan was over £115,000, making this small, relatively poor economy one of the most high-value luxury car markets in the world – alongside Switzerland, Luxembourg and Saudi Arabia.
The total value of UK car exports to Azerbaijan in the two years since the invasion of Ukraine and the imposition of sanctions is now £523m. That compares to £58m in the immediately preceding two years.
Britain’s motor lobby group, the Society of Motor Manufacturers and Traders (SMMT), has insisted that this 800% increase can be explained by domestic factors in the Azerbaijani economy – and is not connected with Russian sanctions.
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March: British-made luxury cars still being bought by rich Russians
Read more:
UK-made cars are getting into Russia despite sanctions
2,000% increase in car sales to Azerbaijan ‘has nothing to do with Russia’
An SMMT spokesperson said: “UK carmakers comply with all trade sanctions and would condemn any party putting that commitment at risk. Car exports from UK factories to Azerbaijan have grown since 2019 due to multiple factors, including significant new model launches, pent-up demand and a growing domestic appetite for UK luxury cars. Indeed, UN data shows that just two cars of any origin have been officially exported from Azerbaijan to Russia this year.
“We have never ruled out the possibility that third parties might exploit any vulnerabilities in the sanction regime, and manufacturers do everything in their power to prevent this. Any UK-built vehicle on sale in Russia found its way there without their authorisation. This is a fast-moving global issue covering products from multiple sectors in many countries deploying sanctions, and tackling any vulnerabilities requires a coordinated, global response.”
However, while United Nations (UN) data suggests the quantity of cars being officially exported to Russia remains low, that same evidence suggests that, far from behaving like a normal car market, Azerbaijan does seem to be funnelling cars off elsewhere into Central Asia.
Contrary to the SMMT’s analysis, which suggests the car exports can be explained by domestic factors, car exports from Azerbaijan have risen by 4,800% since the invasion of Russia, with most of the cars destined (according to UN data) for Kazakhstan, Kyrgyzstan, Georgia and the United Arab Emirates.
According to UK government sources, these states are understood to be widely used as conduits for goods into Russia.
Cars are not the only British goods to have seen a large spike in exports to Central Asia and the Caucasus – so too have components and machinery used to make weapons. In a visit to Kyrgyzstan this week, Foreign Secretary Lord Cameron admitted that Russia is using central Asian countries to sidestep sanctions and build its “war machine”.
There is “considerably more doubt” over when future interest rate cuts can take place, the governor of the Bank of England has said.
Andrew Bailey told a committee of MPs that the risks around inflation had gone up and he was “more concerned” about weakness in the labour market.
Bank staff projections expect the main consumer prices index measure of inflation to rise to 4% this year – double the 2% target rate – from its current level of 3.8%. Food prices are proving the main driver currently, with part of the increases blamed on government tax rises on employers.
On the prospects for further interest rate reductions this year, Mr Bailey said: “There is now considerably more doubt about when and exactly how quickly we can make those further steps.”
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Interest rates are elevated to help ease the pace of price growth and cut, when able, to help maintain inflation at the 2% target level.
The governor was speaking after the Bank’s split vote last month that resulted in a quarter point reduction for Bank rate to 4%.
At that time, the governor said that while he still believed that the future path for borrowing costs was still downwards gradually over time, financial markets had since understood that the outlook for the pace of cuts was more murky.
“That’s the message I wanted to get across”, he told the Treasury select committee.
“Now, I think actually, judging by what’s happened, certainly to market pricing since then, I think that message has been understood.”
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A further quarter point cut to 3.75% is no longer fully priced in for this year, according to LSEG data on market expectations.
He was speaking as financial markets continued to see a widespread sell-off of long-dated bonds, largely over fears of rising government debt levels in many western economies including the US and UK.
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Why did UK debt just get more expensive?
The activity has taken the yield – the effective interest rate demanded by investors – in 30-year gilts to a 27-year high this week. Other shorter dated bonds have also risen sharply.
But Mr Bailey urged less of an emphasis on the long-term gilts, as headlines point out that any increase in the cost of servicing government debt is a headache chancellor Rachel Reeves can well do without as she battles to balance the books.
He told the MPs: “It’s important not to … over focus on the 30-year bond rate. Of course, it’s a number that gets quoted a lot, it’s quite a high number. It is actually not a number that is being used for funding at all at the moment.”
Mr Bailey also waded into the continuing row across the Atlantic that sees the independence of the US central bank, the Federal Reserve, threatened by Donald Trump and his quest for interest rate cuts.
He has moved to fire a Fed governor over alleged mortgage fraud and make a new appointment but Lisa Cook, who was appointed to the board by Joe Biden, is fighting his bid to oust her in the courts.
“This is a very serious situation”, Mr Bailey said.
“I am very concerned. The Federal Reserve… has built up a very strong reputation for independence and for its decision making,”, adding that trading central bank independence against other government decisions would be a “very dangerous road to go down”.
After hitting the highest level this century on Tuesday, the cost of long term UK government borrowing has now hit a fresh 27-year high.
The interest rate demanded by investors on the state’s long-dated borrowing (30-year bonds) rose to just below 5.75%, surpassing the 5.72% peak reached on Tuesday, pushing it to a high not seen since May 1998.
It comes as the government auctioned off these long-term loans on Tuesday and was forced to pay a premium to do so.
Issuing bonds is a routine way states raise money.
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As well as meaning the state has to pay more to borrow money, high interest rates on debt can signify reduced investor confidence in the ability of the UK to pay back these loans.
As the trading session continued, the interest rates on long-term government bonds, known as gilt yields, fell back to just above 5.66%, not enough to erase two days of rises.
The benchmark for state borrowing costs, the interest rate on 10-year bonds, also saw rises. The yield rose above 4.8% for the first time since January, before slightly falling back
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Why did UK debt just get more expensive?
The spiked borrowing cost also continued to cause a weakening in the pound.
After an initial fall to a month-long low against the dollar, one pound again buys $1.34.
It means sterling goes less far in dollars than before the latest peak in interest rates on government bonds. On Monday, sterling could buy $1.35.
Sterling dropped to equal €1.14 before easing up to €1.15. Just a few months earlier, a pound could buy €1.19 before Donald Trump’s April country-specific tariff announcements.
So why has this happened?
Government borrowing costs have been rising across the world amid a sell-off in bonds – which prompts investors to look for a higher return to hold them.
High inflation and national debts have increased concern about whether states can pay back the money.
Japan’s long-term borrowing cost hit a record high, while the yield on the US’s benchmark 10-year bond hit the 5% mark for the first time since July.
UK bond yields tend to follow the US.
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Key to easing UK borrowing costs was the announcement of the date of the budget on Wednesday morning.
UK public finances had been a worry for markets as Chancellor Rachel Reeves struggles to stick to her fiscal rules to bring down the debt and balance the budget.
Disquiet around comparatively low growth in the UK economy also played a role.
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