A Russian flag with a cat's paw prints imprinted across it.

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A year in, how are the sanctions imposed by the West on Russian entities, goods, assets and individuals taking shape? Have we reached the point of sanctions overreach? Anita Hawser investigates. 

“The basic objective of sanctions,” says long-time Kremlin critic and former Russia investor, Bill Browder, “is to starve Russian president Vladimir Putin of financial resources.” So, have the thousands of sanctions levied against Russian entities, goods and individuals by more than 30 countries following Russia’s invasion of Ukraine, done this? The answer, Mr Browder says, is partially.

“There’s $350bn of central bank reserves which are frozen that [Mr Putin] doesn’t have access to. There’s somewhere north of $100bn dollars of oligarch’s money that’s been frozen. The major Russian banks no longer have access to the capital markets. Many Western companies have either fully or partially withdrawn from Russia.

“So, one could argue that the sanctions have diminished his financial capacity to fight this war, but they haven’t eliminated it. He still has money flowing from the sale of oil and gas, and very large quantities on a daily basis. So, I think we’re in a place right now where we need to do more to cut off his financial resources.” 

Buoyed by oil and gas revenues, Russia actually ran a budget surplus of Rbs557bn ($7.42bn) for the first seven months of 2022, and although gross domestic product (GDP) contracted by 2.1%, this was much less than initially forecast. Moody’s, for example, predicted Russia’s economy would contract by 7%.

“The Russian economy has weathered sanctions better than we expected in 2022, thanks to a more resilient export performance and decisive policy action from the government that helped to avoid more severe economic and financial dislocation,” Moody’s stated in its February 24 assessment of the Russian economy. High commodity prices and the slow introduction of sanctions on commodities supported “a degree of resilience” in Russian exports, it added. Russia was able to redirect crude oil exports from the EU to China, India and Turkey, at deep discounts relative to market prices, said Moody’s, which more than made up for the drop in supplies to the EU and the UK in 2022. 

Moody’s expects the Russian economy to continue to weaken this year — GDP is forecast to contract by 3% — as the impact of international sanctions becomes more severe. A year of conflict has also eaten into Mr Putin’s war chest, with January 2023 seeing Russia’s budget deficit balloon to a record Rbs1.8tn. “Russia will make less money out of oil [this year],” observes Nicolas Véron, a senior fellow at European think tank Bruegel and the Peterson Institute for International Economics in Washington DC, “as oil prices have gone down and a number of export markets are no longer there.” But this is hardly the economic knockout blow many had expected.

Targeting oil

Another key plank in the Western strategy of sanctioning Russia is the oil trade. In February this year, G7 countries introduced $100 price caps on seaborne Russian oil products such as diesel and gasoline, while lower-value products such as fuel oil are capped at $45. However, George Voloshin, a global anti-financial crime expert at the Association of Certified Anti-Money Laundering Specialists, says the impact of the price caps is likely to play out over a longer timeframe, as Russia is currently managing to sell crude oil using a shadow fleet of tankers insured by non-Western facilities.

“Half-measures have been taken when it comes to oil,” observes Mr Browder. “We need to actually take full measures. We’ve done price caps, but why are we even allowing them to sell any oil?”

We need to actually take full measures. We’ve done price caps, but why are we even allowing them to sell any oil?

Bill Browder

However, Michael O’Kane, a senior partner at UK law firm Peters and Peters and co-author of an online resource on EU sanctions, asks how you can realistically stop the selling of Russian oil and gas. “Russia is selling more to the East to replace the impact of restrictions in the West,” he says. “Sanctions seem to be being used here instead of diplomacy.”

Daniel Tannebaum, a partner in Oliver Wyman’s risk and public policy practice, where he leads the global anti-financial crime practice, says sanctions are like a cut that bleeds out over time. “Has the Russian economy faced that knockout blow? No, they haven’t. Will [sanctions] continue to hurt them? Absolutely.”

He adds that there are many reasons why the Russian sanctions have been slow to take effect. “We haven’t had an economy close to [Russia’s] size that’s so integrated in global supply chain efforts be sanctioned before,” he says. “Sanctions take time to really grab hold. Look at Iran: it has been under sanctions for over 40 years and they’re still able to kind of muddle through. You’re constantly looking to plug the holes, and that’s why most sanction programmes constantly evolve.”

The most impactful sanctions so far, says Mr Voloshin, have likely been against Russia’s financial sector. With the 10th sanctions package announced by the EU in February, more than 80% of Russia’s total banking assets have now been sanctioned. But as Pedram Moezzi, economist for banking risk at S&P Global Market Intelligence points out, that only equates to 30 out of more than 320 Russian banks, which means there are still potential routes for international transactions and payments to reroute themselves. 

Russia’s two biggest banks, Sberbank and VTB, were sanctioned by the US, the EU and the UK, and cut off from the Swift financial messaging network. Sberbank was also forced to sell its European business at the start of the war. But Mr Moezzi says it is difficult to assess the health of Russia’s banks, as the reporting of banking sector data was curtailed through 2022 as a sanction-proofing measure taken by the Russian central bank.

However, the full-year picture recently released by the Russian central bank points to a return to profitability, he says, for the sector as a whole, despite large losses incurred in June 2022. “Regardless, loosened regulatory lending limits at the start of the conflict, aimed at spurring on lending, have formed pockets of credit risks, especially for the retail loan segment, with early signs of forthcoming asset quality deterioration.”

The price of delayed action

Sberbank may be cut off from Swift, but according to Mr Voloshin, it can still access Russia’s national payment system, the Financial Messaging System of the Bank of Russia, which it is using “aggressively” to send money to friendly countries.

As the sanctions ratchet up, authorities have turned their attention to smaller Russian banks which were not hit with sanctions in earlier rounds. Russia’s MTS Bank, for example, which was granted a banking licence in the UAE last year, was recently sanctioned by the UK and the US. “The West should have gone faster and further by hitting the entire Russian banking sector with sanctions,” says Mr Véron. “There is a price for delayed action.”

Many Russian industrial corporations, including the defence sector, have targeted these smaller Russian banks, to facilitate payments, says Mr Voloshin. “[These banks] are still within Swift and have correspondent relationships with various foreign banks. So, we’re seeing a lot of pressure mounting against these banks, which have been used as a way of sanctions evasion and keeping the door open to the global financial system more broadly.”

we’re seeing a lot of pressure mounting against [smaller Russian] banks, which have been used as a way of sanctions evasion

George Voloshin

A spokesperson for the National Bank of Ukraine’s (NBU) press office says targeting specific banks in Russia has allowed Russia to evade sanctions and made it harder to control Russian transactions. It calls for the disconnection of all Russian banks from Swift, so it is completely impossible for Russia to bypass the restrictions.

“There is a need to constantly step up efforts to block the Russian financial system in its entirety,” the spokesperson says. “It is important to tighten sanctions not only against banks, but also against the Russian financial sector in general, which is fuelling the aggressor’s ability to wage war against Ukraine.”

The NBU has also called for sanctions to be applied to the top managers of Russia’s banks. Ukraine has already imposed sanctions against the heads of Russia’s 30 largest banks and banks affiliated with its military-industrial sector. 

But it is not just banks that are in the spotlight. Evidence suggests that third countries friendly with Russia — the UAE, Turkey and Armenia — are also helping it get around sanctions. “[Mr] Putin has all sorts of enablers in the West and the East that are helping him,” says Mr Browder. “I suspect that as time goes on, a lot of the people who are helping him are not going to help him anymore, because they’re going to see it’s not in their interest. We should make business impossible for companies and countries that are not abiding by the sanctions. The countries themselves have to make a choice. Do they want good business or do they want to just be friends with Russia? Because you can’t have both.”

Playing at full fitness

If 2022 was about getting “match fit”, with Western allies throwing as much “spaghetti at the wall in terms of sanctions”, 2023 is about playing the match at full fitness, according to Tom Keatinge, the founding director of the Centre for Financial Crime and Security Studies at the Royal United Services Institute in London. “We need to identify where evasion is happening and make the net … as small as possible. You’re not going to catch everything. But now the [holes in the net are] quite big, and we need to tighten it.”

The past 12 months have been a steep learning curve for many countries and industry sectors that did not really understand what sanctions were when the war started, says Mr Keatinge. “But the banks were on it from day one,” he says. “They have no excuses. They should know what to do.”

Banks certainly have decades of experience under their belt when it comes to implementing different sanctions regimes, but at the Bankers Association for Finance and Trade’s (BAFT’s) Europe Forum in London recently, one sanctions head from a leading European bank described the experience of the past 12 months as “painful”, given the sheer frequency and volume of sanctions. “Sometimes we’ve had three regulatory changes a day,” they said.

The EU sanctions environment is further complicated by the fact that every member state interprets and enforces sanctions differently. “Different agencies are responsible for enforcing sanctions and there are different approaches to enforcement,” says Mr Keatinge.

For the most part, banks are well-equipped to handle a list-based sanctions programme, says Mr Tannebaum of Oliver Wyman, because it is just adding names to watch lists. “The challenge is around some of the securities and investment-related restrictions, which have been challenging for banks to execute. But if the sanctions get more restrictive, that only makes it easier to operationalise because it creates more black and white bands.” Regardless of whether sanctions programmes scale or not, the banks will just have to figure it out, Mr Tannebaum says. Ultimately, they have no choice.

According to industry sources, questions are cropping up around whether banks are allowed to process payments or trade-related documents, such as letters of credit for entities owned by Russian individuals, or people of Russian origin with a Russian passport. Sometimes the regulatory guidance is unclear, says one source. So, it is up to the institutions, their legal counsel and other players to draw their own conclusions.

Another challenge for banks is specific goods and services that are exempted from sanctions. “Before you release a payment to a beneficiary, do you reach out to that client and say, ‘Well, was [the transaction] under the exemption or not?” says Deepa Sinha, vice-president of payments and financial crime at BAFT. “Imagine multiplying that by millions of transactions,” she adds. “Do banks even have the manpower to follow up and ensure that every payment coming through related to a trade is for a product or item that is allowed?”

Carleen Hadley, secretary for BAFT Europe’s sanctions forum, says it is a toss-up between doing the right thing as a bank and doing business, but it is a very high risk in terms of regulatory penalties if a bank gets it wrong, she says.

In 2014, France’s largest bank, BNP Paribas, paid a record $9bn to settle claims that it broke US sanctions against trade with Sudan, Iran and Cuba. But financial crime experts insist things have moved on since then. Ms Hadley says some banks now have members of their compliance team located on the ground in various divisions. “In my early days of compliance, you were the most hated person in the building,” she says. “But now you’re very much a part of a team and you work together to make transactions happen where possible.”

Andrew Davies, global head of regulatory affairs at anti-money-laundering software provider ComplyAdvantage, says the evolution and application of technology over the past 30 years have helped banks be more effective in implementing sanctions. “When I first started in this business, we were just screening Swift messages and some other high-value payments,” he says. “Now, we’re looking at customer due diligence as you onboard a customer and networks of relationships that could be linked to a sanctioned entity.”

Banks must ensure they look at relationships in transaction flows, says Mr Davies, to see if there are connected bad actors that may not be sanctioned and that could facilitate the movement of money to evade sanctions. “Banks need to adopt a risk-based approach, so they understand who they’re doing business with, and the types of products and services they’ve got,” he explains. “If they haven’t adopted an effective approach then they are at risk of violating sanctions.”

Sanctions overreach

The most controversial topic right now in the sanctions world is not the risk of banks violating sanctions, but the confiscation of Russian central bank assets. On November 30, 2022, European Commission president Ursula von der Leyen confirmed plans to use €300bn of frozen Russian central bank reserves, as well as more than €19bn of Russian oligarchs’ funds, for the reconstruction of Ukraine.

Mr Voloshin says this has never been done before. Some central bankers are concerned it could set a dangerous precedent and say it needs to be debated at a much higher level, such as the UN. 

“When you begin to look at sovereign assets like central banking assets, those assets do really belong to the people of Russia,” says Mr Tannebaum. “Is it fair to essentially seize the assets of the Russian people for those purposes? That’s a real existential question that a lot of us in this [sanctions] space struggle with.” 

Mr O’Kane says if the West starts seizing state assets, these states could do the same in retaliation, ignoring international law. “We may be getting to the point of sanctions overreach,” he says, “which means sanctions will no longer be as effective. The past 12 months have seen Russia moving into the arms of China, which has its own digital currency, and both countries are taking steps to insulate themselves from the US and Western sanctions.”


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