At a glance
- New sanctions target the company behind Russia’s Mir payment network and 20 local financial institutions
- Companies and individuals in 11 other countries have been targeted
- Sanctions so far have largely failed to dent Russia’s war effort
Washington has moved a step closer to imposing “secondary sanctions” on international financial institutions linked to Russia’s war effort, as the conflict in Ukraine enters its third year.
The US government on Friday unveiled the largest sanctions package of the conflict thus far against more than 500 targets, aimed at “impos[ing] additional costs for Russia’s repression, human rights abuses, and aggression against Ukraine”.
The move coincided with similar moves by the UK and EU, prompted in no small part by the death of opposition leader Alexei Navalny in a Russian penal colony a week earlier.
Of particular note in the new US sanctions package are measures against National Payment Card System Joint Stock Company, or NSPK, the state-owned operator of the country’s Mir national payment system and 20 other Russian financial institutions, as well as sanction evaders in China, Europe, east Asia, central Asia, and the Middle East.
While far from game-changing in terms of the overall trajectory of the conflict, the new measures are a further warning to international banks that have dealings — indirect or otherwise — with the Russian war effort, said Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security.
“The new sanctions announcement closes some loopholes and may raise some costs for Russia, but in the main it’s more about tightening the enforcement of existing measures rather than a dramatic escalation,” she told The Banker.
Yet the sanctioning of NSPK and the naming of international companies puts further pressure on international lenders, following Joe Biden’s executive order in December threatening penalties for financial institutions that help Russia circumvent sanctions.
“The sanctioning coalition in its early days focused on cutting off revenue flows to the Russian government, while seeking to leave more consumer-focused institutions like Mir relatively untouched,” said Ziemba, even though the company’s CEO was sanctioned in September 2022 and the Treasury issued many warnings about sanctions risk about the platform, causing many foreign banks to cut ties.
“The new sanctions on NSPK and other financial institutions look like an interim measure before going down the secondary sanctions route,” she added.
US national security adviser Jake Sullivan in December warned that “anyone supporting Russia’s unlawful war effort is at risk of losing access to the US financial system”.
Sanctions targets
Beyond the financial sector, the new sanctions list targets Russia’s defence industry and procurement networks, together with state-owned shipping company Sovcomflot, in an attempt to tighten enforcement of price-capping rules on Russian crude, which has thus far proved largely ineffective.
In all, the US Treasury’s Office of Foreign Assets Control is targeting 26 third-country entities and individuals in 11 countries, including China, Serbia, the UAE, and Liechtenstein.
The naming of companies and individuals in the UAE came on the same day that the county was removed from the Financial Action Task Force’s grey list, after demonstrating improvements in its ability to police illicit money flows.
While lenders around the world have scrambled to reduce their exposure to sanctioned Russian entities over the past two years, the new measures against international companies add further pressure to banks that have found ways around financing restrictions.
“Naming these entities is designed to put their financing partners on notice and to improve their compliance, essentially having banks further upgrade their [know your customer] and due diligence procedures under the threat of further sanctions,” said Ziemba.
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Scepticism
In spite of the sheer number of companies and individuals impacted by the new measures, there is growing scepticism about their potential effect, or lack thereof, on the Ukraine conflict. After shrinking by 2.1 per cent in 2022 — far less than initially expected — Russia’s economy grew by 2.2 per cent in 2023, according to IMF estimates. Russia found new channels for both imports and exports, with a shadow oil export infrastructure helping the country evade a G7 price cap of $60 a barrel.
While US rhetoric about the threat of secondary sanctions for foreign banks dealing with sanctions busters has become more pronounced, such measures risk damaging consequences for the US and the global financial system.
“If the US were to target a major international financial player in a manner that was not seen as proportionate, it could cause some systemic financial ripples, and may undermine other US financial priorities such as improving relations with China,” said Ziemba.
Such tensions come at a time when China in particular is looking to raise the profile of the renminbi in international trade, reducing the influence of the US dollar, a key goal of the Brics group of economies.
“There are a number of jurisdictions that are becoming increasingly concerned about the weaponisation of the dollar and are looking for alternatives, even if those alternatives look very far off right now,” said Ziemba.
While the renminbi is by far the most commonly used currency from a high-growth potential country part of the Brics group, including Brazil, Russia, China, India and South Africa, the amount of the currency available outside the country remains limited relative to the dollar, with the US dollar still greatly preferred for cross-border payments, said Robert Greene, a non-resident scholar at the Carnegie Endowment for International Peace, in a recent note.
