Russia has found a way to circumvent sanctions on arms purchases.

Russia and Vietnam developed a hidden payment scheme for arms contracts to avoid US and other Western sanctions, according to internal Vietnamese documents reviewed by the agency. Associated Press (AR), profits from joint oil and gas projects are used for this.

The money is used to pay for defense contracts without open transfers through the global banking system.

Under this scheme, Vietnam purchased Russian military equipment—fighter jets, tanks, and ships—on credit. It then repaid the loan with its share of the profits from a joint Russian-Vietnamese oil company operating in Siberia. Such transactions are unusual for international financial markets and allow for secret payments even as sanctions are tightened.

The United States is currently seeking to strengthen ties with Vietnam as a counterweight to China's growing influence in Southeast Asia. Washington is negotiating trade with Hanoi following the White House's imposition of 20% tariffs, while President Donald Trump threatens new, tough sanctions against Moscow.

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The European Union also imposed new sanctions to put pressure on Russian President Vladimir Putin. Trump recently signed an executive order doubling tariffs on India to 50% to force New Delhi to stop buying Russian oil and weapons, which he claims are helping to wage the war against Ukraine.

The president's family business, the Trump Organization, began construction on a luxury $1,5 billion golf course near Hanoi earlier this year after fast-tracking approval from Vietnamese authorities. The company is run by the president's sons, but financial reports for June showed that Trump himself benefits from many of its operations.

The first information about the cooperation scheme between Russia and Vietnam appeared in 2023. However, as follows from a document from last year, the two countries not only finalized and launched it, but also entered into agreements to ensure sufficient funding for future military purchases.

A Vietnamese official who provided the documents to The Associated Press on condition of anonymity said he belongs to a faction that opposes excessive rapprochement with Russia, which could jeopardize relations with Washington.

"These are unusual flexible financing schemes and unconventional barter arrangements," noted Evan Laxman of the International Institute for Strategic Studies. "This is next level."

How the scheme works

The mechanism is based on the use of Vietnam's profits from its joint Russian oil venture in Siberia, Rusvietpetro, to repay loans for military purchases without conducting transactions through the global SWIFT system, controlled by the US and other Western countries.

The plan is as follows:
— Vietnam's profits from Rusvietpetro in Siberia are sent to Moscow to pay off a loan for military purchases;
— surplus profits are transferred to the Russian state oil and gas company Zarubezhneft;
Zarubezhneft, through its joint venture in Vietnam, transfers an equal amount back to the VAT, effectively bypassing international bank transfers. (VAT is an abbreviation for Petrovietnam, or Vietnam Oil and Gas Group. This is Vietnam's state-owned oil and gas company, which manages the production, refining, and export of oil and gas, and also participates in joint projects with foreign companies.) Note.)

"In a situation where the US and Western countries have imposed sanctions against Russia in general and excluded it from SWIFT in particular, this payment method is considered sufficiently confidential and suitable, as the money circulates only within Russia and Vietnam, and Vietnam does not need to fear the consequences of the US embargo," PVN CEO Le Ngoc Son wrote in a document dated June 11, 2024.

Laxman said he was unaware of the arrangement, but it fits Moscow's approach to arms deals in the region: for example, in 2017, Russia agreed to supply Indonesia with 11 Su-35 fighter jets in exchange for palm oil, coffee, and other goods.

Two Western diplomats in Hanoi, speaking on condition of anonymity, told the Associated Press that they had long suspected a behind-the-scenes agreement between Vietnam and Russia over payments for major military contracts, but the details outlined in the documents were new to them.

Why is such a mechanism needed?

Zarubezhneft is not currently under sanctions, but its CEO, Sergei Kudryashov, was added to the expanded energy sector sanctions list in January, ten days before Trump's inauguration. Chairman of the Board of Directors, Yevgeny Murov, a former KGB officer, was sanctioned by the US back in 2014 when he headed the Federal Protective Service.

The scheme described in the documents appears to be designed to shield the transactions from potential future sanctions, including secondary sanctions that could be imposed on those assisting companies or individuals targeted by primary sanctions.

Following a new wave of Russian strikes on Ukraine this month, Trump announced his readiness to move to a second phase of sanctions against Moscow or countries purchasing its oil. EU and US officials recently discussed this in Washington, and the UK announced a new package of measures, including a ban on 70 vessels from the "shadow fleet" allegedly transporting Russian oil in defiance of sanctions.

The main threat of secondary sanctions stems from the US law CAATSA (Countering America's Adversaries Through Sanctions Act), passed during Trump's first term. It allows sanctions to be imposed on countries or individuals doing business with the Russian military-industrial complex.

Vietnam's Growing Strategic Role

Vietnam has one of the most capable militaries in Southeast Asia. It is strengthening its naval and air force against a potential threat from China. Although China is Vietnam's largest trading partner, disputes over the South China Sea are intensifying.

The United States, meanwhile, is Vietnam's largest market. Since the lifting of the American arms embargo in 2016, Washington, as previously mentioned, has viewed Hanoi as a strategic partner to contain China.

However, long-standing defense cooperation with Moscow means that Vietnam will remain dependent on Russian spare parts and materials for a long time to come. The new contracts demonstrate that, despite its rapprochement with the United States, Hanoi is not moving away from the Kremlin.

In 2011, Russia provided Vietnam with a $2 billion loan for the purchase of two frigates and 64 T-90S tanks. In 2023, another $8 billion loan package was agreed upon for the delivery of Su-30 fighter jets and two frigates, which have not yet been delivered.

In March 2023, the New York Times reported on the initial plans. At the time, Vietnam's Ministry of Finance warned that deals with Russia could trigger US sanctions, as the US "constantly pressures Vietnam to switch to purchasing American weapons and threatens sanctions under CAATSA if Vietnam continues to buy Russian weapons."

However, it was noted that Washington may refrain from sanctions because it “values ​​Vietnam’s role in implementing the Indo-Pacific strategy” aimed at containing China.

The plans outlined in the documents have already been realized. During Putin's visit to Hanoi in June 2024, Zarubezhneft received a license to develop the Block 11-2 gas field on the continental shelf of Vietnam—the very area mentioned in the 2024 VAT memorandum. An internal VAT document from April 2024, obtained by the AP from another source, stated that Zarubezhneft had begun 3D mapping of the block.

Already in May, a delegation led by To Lam, Vietnam's top leader, signed a number of agreements on oil and gas exploration and a "Strategic Partnership Plan" in defense and other areas for 2026–2030 during a visit to Moscow.

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As Huong Le-Thu of the International Crisis Group noted, the question now remains how this scheme will be used against the backdrop of growing sanctions pressure from the EU and the US.

"Vietnam will have to navigate a less favorable diplomatic environment, where excessive closeness to Russia is poorly received in European capitals," she said, emphasizing that the current US administration is conducting business much more pragmatically.

"It is safe to assume that it will not be as generous as previous administrations," Huong Le-Thu noted, "even given Vietnam's strategic importance."

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