A US crackdown on banks financing trade in goods for Vladimir Putin’s invasion of Ukraine has made it much more difficult to move money in and out of Russia, according to senior western officials and Russian financiers.
Moscow’s trade volumes with key partners such as Turkey and China have slumped in the first quarter of this year after the US targeted international banks helping Russia acquire critical products to aid its war effort.
A US executive order, implemented late last year, prompted lenders to drop Russian counterparties and avoid transactions in a range of currencies, said western officials and three senior Russian financiers.
“It has become harder for Russia to access the financial services that it needs to get these goods,” said Anna Morris, deputy assistant secretary for global affairs at the US Treasury.
“It’s definitely a goal to make it much more difficult for that money to flow, to increase the cost to the Russians [and] the friction in the system. Disruption is an important outcome,” she added.
Getting around the restrictions now requires a growing network of middlemen to avoid regulatory scrutiny even if the transactions have nothing to do with Russia’s war machine, the officials and financiers said, while increasing currency conversion and commission costs.
“It’s getting harder and harder every month. One month it is dollars, the next month it is euros; within six months you basically won’t be able to do anything. The logical endpoint of this is turning Russia into Iran,” said a senior Russian investor, referring to strict financial sanctions against Tehran.
The US executive order is designed to target banks in countries that recorded sharp rises in trade with Russia after the west imposed sanctions following Moscow’s full-scale invasion of Ukraine more than two years ago.
Turkey’s exports of “high-priority” goods — items mainly for civilian use but identified as critical for the war effort, such as microchips — to Russia and five former Soviet countries soared after the full-scale invasion of Ukraine. According to Trade Data Monitor, the volume hit $586mn in 2023, a fivefold increase on prewar volumes.
But in the first quarter of this year, Turkey’s exports to Russia fell by a third year on year to $2.1bn. And the value of its reported exports of high-priority goods to Russia and its neighbouring countries fell 40 per cent to $93mn in the first quarter of 2024 from the previous quarter, showing the impact of the executive order.
The sharp drops in war-related exports are attributable to banks’ fear of repercussions from the US, which can track any dollar transaction and cripple lenders by cutting them out of the dollar-based financial system, US officials and experts said.
The Treasury can hit lenders with secondary sanctions if it suspects they are dealing with companies that are banned because of their links to Russia’s military-industrial complex.
“The US really has leverage over the financial sector,” said Elina Ribakova, a non-resident senior fellow at the Peterson Institute for International Economics. “It can find out if you’re doing something wrong, even the smallest bank, if you are somehow connected to the dollar. So that scares people.”
The restrictions on payments have had a chilling effect far beyond the shadow trade in components for Russia’s war machine, as banks cut off entire categories of transactions with Moscow rather than fall foul of US sanctions.
Russian traders have turned to smaller banks and alternative currencies as major banks in countries such as Turkey and China shy away.
Vladimir Potanin, the oligarch who controls Norilsk Nickel metals group, recently said sanctions had cut the company’s revenue by at least 15 per cent since 2022, in part because of 5 to 7 per cent commissions to middlemen on export transactions.
Traders selling goods to Russia, including restricted goods, are less likely to be deterred than banks, said Jane Shvets, a partner and sanctions expert at US law firm Debevoise & Plimpton.
“The pullback of larger financial institutions has disrupted the trade, but the question is whether it will bounce back as these ‘shadier’ alternatives for moving money proliferate,” she said.
The increasingly complex transactions risk confounding western regulators hunting trade in restricted goods as Russian entities and their counterparties add more transactions separating buyer and seller, said Matis Mäeker, head of Estonia’s financial intelligence unit.
“If you have four banks in the chain, that means there are several payments or hops connected from one transaction that previously moved from A to B” as money passes between users, he said.
That is increasing the cost of transactions, yet also making it harder for enforcement authorities to see them in time, he added. “There are so many banks in the world — they will find a new way to bypass the sanctions,” he said.
Russian importers and exporters are also settling more trades in roubles because of the difficulties of swapping the currency for dollars and euros, according to financiers involved.
Traders buying Russian oil in India are now conducting transactions in roubles after the US pushed banks in the United Arab Emirates to stamp out payments in dirhams, said a senior Russian banker and a former Russian oil executive.
“This is a sanctions loophole,” said the senior Russian banker, adding that foreigners are permitted to buy roubles on the Moscow Exchange for use in payment settlements with Russian counterparties. “These payments are easily processed because [foreign banks] can open correspondent accounts in roubles at the Russian branches of foreign banks.”
He believes the rouble will become “the main currency in the underbelly of Russia, because that’s the only way to make sure that [the US Treasury’s Office of Foreign Assets Control] does not see it”.
In early April the Bank of Georgia, the second-largest lender in the Caucasus nation and listed on the London Stock Exchange, told its customers that transfers to Russia in “technology, construction, industrial and aviation” would only be made in roubles.
The change was made “in compliance with Ofac requirements”, said the message, which seen by the Financial Times. Bank of Georgia did not immediately respond to a request for comment.
Cross-border payments are increasingly being carried out in roubles, while the use of the Chinese, Turkish and UAE currencies are declining, according to Russia’s central bank. Before the 2022 war, less than 15 per cent of Russian exports were paid in roubles. But the currency’s share rose to 40 per cent in February this year, with the highest jump recorded after the US executive order.
For imports, payments in roubles have increased to about 40 per cent from a prewar level of 30 per cent.
The rouble’s limited convertibility, however, makes it difficult for Russian banks and counterparties to make up the lost volume of trade in dollars and other western currencies, the senior Russian investor said.
“Even the friendliest jurisdictions like Kyrgyzstan are vulnerable. And you cannot take that much out there anyway because the capital of these banks is all so small,” the investor said.