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The Biden administration will blacklist foreign financial institutions that support Russia’s military industrial complex as part of Washington’s efforts to starve Moscow’s war machine.
An executive order to be issued on Friday will enable the US to place sanctions on financial institutions helping Russia secure the equipment and other goods it needs to keep fighting in Ukraine. Banks under sanctions would be denied access to the US financial system.
“This announcement makes clear that those financing and facilitating the transactions of goods that end up on the battlefield will face severe consequences,” deputy US Treasury secretary Wally Adeyemo wrote in a Financial Times op-ed on Friday.
One senior US official said Russia had spent “considerable time and resources” directing its intelligence services to find ways to evade sanctions and export controls. This included using “both witting and unwitting” financial intermediaries to circumvent restrictions and source critical components.
The Biden administration will work with US and European banks to inform them about the new rules and to make sure they communicate with their correspondent banks about how to avoid the new sanctions — or risk being cut off from the American financial system, the senior official said.
Examples of sensitive items that banks should avoid facilitating include semiconductors, machine tools, chemical precursors, ball bearings and optical systems, the official said.
“What we’re trying to do is go after materials that are key to Russia’s ability to build weapons of war,” a senior US administration official said.
“In order for them to get those materials, they need to use the financial system, which makes the financial system a potential choke point and this is a tool that’s targeted at that choke point.”
While many western lenders have pulled out of Russia since the start of the war, others have remained, generating outsized profits as they have gained market share.
Austria’s Raiffeisen Bank International, the western institution with the biggest operations, generated more than half of its earnings this year from business in Russia.
The bank insists its hands are tied because of Kremlin legislation that traps profits in Russia and requires the permission of President Vladimir Putin for any asset sale. The US Treasury asked the bank to fully disclose details of all its lending activities in Russia earlier this year.
Other lenders that still have some operations in Russia include Italy’s UniCredit and OTP Bank of Hungary. But as western groups have reined in their Russia exposure, other international lenders have stepped in.
China has emerged as a particularly important source of finance for Russian businesses. Washington’s threat to cut non-compliant lenders off from the US market could have significant diplomatic ramifications with Beijing.
The Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China have all begun significantly ratcheting up their activities in Russia.
The decision to target banks is part of a broader push by the US and other countries to find alternate funds for Ukraine, including a possible move by the G7 to seize some of the $300bn of frozen Russian sovereign assets to fund Kyiv.
The new order also comes as Republicans in Congress continue to thwart Biden administration efforts to provide US funding for Kyiv after almost two years of fighting since Russia invaded Ukraine.
Ukrainian forces are gearing up for a protracted war of attrition with Russia next year after a failed summer counteroffensive. Russia has boosted its own military production and Ukraine will need to draw deeper on its own resources to hold its lines next year, analysts said.
“Our overall goal here is to put sand in the gears of Russia’s supply chain, which we think is one of the most effective ways to slow Russia down,” the senior administration official said.
“But in order for the Ukrainians to speed up frankly and go faster, they need our support and that’s going to require Congress to act.”
The US and the UK are also working to tighten their enforcement of a price cap on Russian oil exports that was imposed by G7 countries last year.
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