Unlock the US Election Countdown newsletter for free
The stories that matter on money and politics in the race for the White House
The US is warning countries trading with Russia that they risk secondary sanctions if they allow Russian banks to set up local branches to finance the supply of goods for Vladimir Putin’s war machine.
The move is aimed at closing workarounds that Russia has used to circumvent sanctions, notably by finding obscure means to pay for dual-use goods needed to make arms for its invasion of Ukraine.
Wally Adeyemo, US deputy Treasury secretary, told the Financial Times that Washington was now prepared to pursue countries that let Russian banks set up branches in their jurisdictions to evade western sanctions — even if the bank itself was not under sanction.
“We will go after the branch they’re setting up, but also the other entities and the companies in your jurisdiction that work with them,” Adeyemo said.
“It isn’t only a warning toward doing business with subsidiaries or branches of an already sanctioned institution,” he added, saying countries should stop any Russian branch or subsidiary from being established “since it is going to be used to circumvent the sanctions that our coalition has put in place”.
The measures are the latest in a series of rule changes designed to frustrate Russia’s imports of sensitive war-related goods by making banks across the world wary of becoming involved in the financing of the trade.
An executive order released by the White House in December 2023 warned foreign financial institutions that they were at risk of secondary sanctions if they conducted or facilitated transactions related to the Russian military-industrial complex. The entities covered were broadened in June to cover any sanctioned Russian entity.
The threat has been credited with causing significant problems for Russia in financing the import of sensitive items. Official trade data shows that exports from China and Turkey to Russia of the most critical war-related goods fell dramatically following the order.
Exports from China of so-called “high-priority’” goods, a set of exports that the US and its allies have made particular efforts to stop, dropped from $421mn in December to $212mn in February.
Adeyemo said Russia had continued to struggle to find payment channels for the goods after recent US sanctions against companies such as VTB Bank Shanghai, the only representative office of a Russian bank in China, which the US blacklisted in June.
Speaking after the US decision, Andrei Kostin, VTB’s chief executive, admitted Russia was struggling to find new loopholes before the US managed to close them.
“We have noticed that whatever steps we take, the western reaction is very quick,” Kostin said at a conference in July. “As soon as we do anything anywhere, a delegation of 10 people arrives and starts beating the local authorities over the head to stop us.”
Kostin said “the situation is getting worse every day, but we are still solving it, and goods are flowing”.
Adeyemo said the US was shifting its focus to smaller banks in new countries after an earlier round of pressure prompted bigger lenders in countries such as China, Turkey and the UAE to drop Russian counterparties.
Russia is making efforts to set up alternative payment systems, strong enough to resist western pressure, with countries such as China and Iran that share its resentment of US financial dominance.
Chinese premier Li Qiang and Russian prime minister Mikhail Mishustin pledged to “ensure that settlement channels function seamlessly and properly” after a meeting in Moscow on Thursday. This includes using the renminbi and rouble for more transactions, opening more correspondent accounts in their respective countries, and supporting closer ties between their financial systems.
But Adeyemo said the west’s dominance of global finance meant most major banks caved in under the western pressure. “They do far more business with the US, the EU, the UK and the rest of our coalition than they do with Russia,” he said. “They don’t want to lose access to the dollar, the euro, the pound or the yen.”
The US Treasury on Friday also added 400 individuals and entities “whose products and services enable Russia to sustain its war effort and evade sanctions” to the sanctions lists. The new entrants include companies accused of procuring ammunition, laundering gold, obtaining machine tools and helping oligarchs evade sanctions.
Read the full article here
