A U.S. crackdown on banks financing trade in goods for President Vladimir Putin’s invasion of Ukraine is making it more difficult to get money into and out of Russia, Western officials and Russian financial officials say. .
Russia’s trade volume with major partners such as Turkey and China fell in the first quarter of this year after the US targeted international banks that help Russia acquire critical products to support the war effort. The market slumped.
A U.S. executive order enacted late last year forced financial institutions to exclude Russian counterparties and avoid transactions in various currencies, according to Western officials and three senior Russian financial institutions. .
“It is becoming increasingly difficult for Russia to access the financial services it needs to obtain these products,” said Anna Morris, the U.S. Treasury Department’s acting assistant secretary for terrorist financing and financial crimes. Ta.
“There is no doubt that the goal is to make that flow of money more difficult and increase the cost to Russians (and) friction within the system. Disruption is an important outcome,” she added.
Officials and financial insiders say circumventing regulations requires expanding networks of intermediaries to avoid regulatory scrutiny, even if the transactions are unrelated to Russia’s war machine. On the other hand, the cost of currency conversion and fees will also increase.
“Every month it gets harder and harder. One month it’s dollars, the next month it’s euros. Within six months you’ll basically be unable to do anything. The logical end goal of this is to turn Russia into Iran.” a senior Russian investor said, referring to tough financial sanctions against Tehran.
Russia’s strategic missile carrier is in production. War-related imports from countries such as Turkey have fallen sharply as banks shun such transactions © Kristina Kormilitsyna/Kremlin/Sputnik/Reuters
The U.S. executive order aims to target banks in the country, which saw a surge in trade with Russia after Western countries imposed sanctions in response to Russia’s full-scale invasion of Ukraine more than two years ago.
Turkey’s exports of “high-priority” goods (such as microchips, which are primarily for civilian use but deemed essential to the war effort) to Russia and five former Soviet Union countries soared after the country’s full-scale invasion of Ukraine. According to the Trade Data Monitor, trading volume in 2023 reached $586 million, an increase of five times prewar trading volume.
However, Turkey’s exports to Russia in the first quarter of this year were $2.1 billion, down three years from the same period last year. Additionally, the reported value of high-priority goods to Russia and its neighbors decreased by 40% from the previous quarter to $93 million in the first quarter of 2024, demonstrating the impact of the executive order.
U.S. officials say the sharp decline in war-related exports is due to banks fearing influence from the United States, which tracks every dollar transaction and could paralyze lenders by locking them out of the dollar-based financial system. said the expert.
Some content could not be loaded. Please check your internet connection or browser settings.
The Treasury Department could impose secondary sanctions on lenders if they are suspected of doing business with companies that are banned because of their ties to Russia’s military-industrial complex.
“The United States has real influence over the financial sector,” said Elina Rybakova, a nonresident senior fellow at the Peterson Institute for International Economics. “Any bank, no matter how small, can tell if it’s doing something wrong if it’s somehow connected to the dollar. That’s why it scares people.”
Payment restrictions have a chilling effect far beyond the shadow trading of parts of Russia’s war machine, as banks are blocking all kinds of transactions with Russia rather than violating U.S. sanctions. .
Russian traders are turning to smaller banks and alternative currencies as large banks in countries such as Turkey and China shun them.
Vladimir Potanin, the oligarch who controls the Norilsk Nickel Metals Group, recently said that sanctions have reduced the company’s revenue by at least 15% from 2022 onwards, and that fees charged to intermediaries on export transactions have decreased by 5-7%. % was also a contributing factor.
Jane Shvetz, a partner and sanctions expert at the US law firm Debevoise & Plimpton, said sellers of goods to Russia, including restricted items, were less likely to be stopped than banks.
“The withdrawal of major financial institutions has disrupted trading, but the question is whether trading will recover as these ‘dubious’ alternatives proliferate,” he said.
Matthijs Maker, head of Estonia’s financial intelligence department, said Russian companies and their trading partners are increasingly making transactions that separate buyers and sellers, confusing Western regulators looking to trade in restricted goods. He said there was a risk of it happening.
“Having four banks in the chain means that when money moves between users, there are multiple payments and hops connected from a single transaction that previously went from A to B,” he said. It means that there is.”
This not only increases transaction costs, but also makes it difficult for enforcement authorities to catch transactions in time, he added. “There are so many banks in the world, and they will find new ways to get around sanctions,” he said.
According to related financial institutions, Russian importers and exporters are also increasingly settling transactions in rubles, as it is difficult to convert currency into dollars or euros.
Traders buying Russian crude oil in India are now trading in rubles after the United States urged banks in the United Arab Emirates to stop paying in dirhams, according to a Russian bank executive and former Russian oil executive. It is said that they are doing this.
“This is a loophole in the sanctions,” the Russian bank official said, adding that foreigners are allowed to buy rubles on the Moscow exchange to use in payments with Russian counterparties. “These payments are easily processed because[foreign banks]can open correspondent accounts in rubles at Russian branches of foreign banks.”
He believes the ruble “will become the main currency of the Russian conspiracy, because that’s the only way to keep it from being recognized by the[U.S. Treasury Department’s Office of Foreign Assets Control].”
In early April, the Bank of Georgia, the second largest financial institution in the Caucasus and listed on the London Stock Exchange, announced that remittances to Russia in the “technology, construction, industry and aviation” sectors would only be made in rubles. informed the customer.
The message, seen by the Financial Times, said the changes were made “in accordance with Ofac requirements.” Bank of Georgia did not respond to a request for comment.
Some content could not be loaded. Please check your internet connection or browser settings.
According to Russia’s central bank, cross-border payments are increasingly being made in rubles, while the use of the currencies of China, Turkey and the UAE is decreasing. Before the 2022 war, less than 15% of Russia’s exports were paid in rubles. However, the currency’s share rose to 40% in February this year, marking the highest rate of increase since the US executive order.
For imported goods, payments in rubles increased from the prewar level of 30% to about 40%.
But the ruble’s limited convertibility makes it difficult for Russian banks and trading partners to replace lost trade volume with dollars and other Western currencies, a senior Russian investor said.
“Even the friendliest jurisdictions, like Kyrgyzstan, are vulnerable. And the capitalization of all these banks is so small that they wouldn’t be able to take out that much money anyway,” investors said. spoke.
