A U.S. crackdown on banks that finance trade in goods for Vladimir Putin’s invasion of Ukraine has made it much more difficult to transfer money to and from Russia, according to senior Western officials and Russian financiers.
Moscow’s trade volumes with key partners such as Turkey and China plunged in the first quarter of this year after the United States targeted international banks that helped Russia purchase key products to support its war effort.
A U.S. executive order that took effect late last year has caused lenders to reject Russian counterparties and avoid transactions in a range of currencies, Western officials and three senior Russian financiers said.
“It has become more difficult for Russia to access the financial services it needs to obtain these goods,” said Anna Morris, deputy assistant secretary of state for global affairs at the U.S. Treasury Department.
“It is definitely a goal to make the flow of money much more difficult and increase costs for 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 evade regulatory scrutiny, even if the transactions have nothing to do with Russia’s war machine, officials and financiers said, while currency conversion and commission costs are rising.
“It’s getting more difficult every month. One month it’s dollars, the next month it’s euros; Within six months, you basically can’t do anything. The logical endpoint of this is to turn Russia into Iran,” a senior Russian investor said, citing tough financial sanctions against Tehran.
The U.S. executive order aims to target banks in countries that saw a sharp increase in trade with Russia after the West imposed sanctions following Moscow’s full-scale invasion of Ukraine more than two years ago.
Turkish exports of “high priority” goods – goods intended primarily for civilian use but considered critical to the war effort, such as microchips – to Russia and five former Soviet countries surged after the full-scale invasion of Ukraine . According to Trade Data Monitor, volume reached $586 million in 2023, a fivefold increase from prewar volume.
But in the first quarter of this year, Turkey’s exports to Russia fell by a third to $2.1 billion compared to the previous year. And the value of its reported exports of high-priority goods to Russia and neighboring countries fell 40 percent to $93 million in the first quarter of 2024 compared to the previous quarter, showing the impact of the executive order.
The sharp decline in war-related exports was due to banks’ fear of the impact of the U.S. tracking every dollar transaction and crippling lenders by excluding them from the dollar-based financial system, U.S. officials and experts said.
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The Treasury Department can impose secondary sanctions on lenders if it suspects they are doing business with companies banned because of their ties to Russia’s military-industrial complex.
“The U.S. really has influence over the financial sector,” said Elina Ribakova, a nonresident senior fellow at the Peterson Institute for International Economics. “It can figure out if you’re doing something wrong, even the smallest bank, if you’re somehow connected to the dollar. So that scares people.”
The payment restrictions had a chilling effect that went well beyond the shadow trade in components for Russia’s war machine, as banks halted entire categories of transactions with Moscow rather than run afoul of U.S. sanctions.
Russian traders have turned to smaller banks and alternative currencies as big banks in countries like Turkey and China shy away.
Vladimir Potanin, the oligarch who controls metals group Norilsk Nickel, recently said that the sanctions had reduced the company’s sales by at least 15 percent since 2022, partly due to commissions of 5 to 7 percent to middlemen in export transactions.
Traders selling goods to Russia, including restricted goods, are less likely to be deterred than banks, said Jane Shvets, partner and sanctions expert at U.S. law firm Debevoise & Plimpton.
“The withdrawal of larger financial institutions has disrupted trading, but the question is whether it will bounce back as these ‘shabbier’ alternatives to moving money become more common,” she said.
The increasingly complex transactions risk Western regulators confusing trade in restricted goods as Russian companies and their counterparties add more transactions that separate buyers and sellers, said Matis Mäeker, head of Estonia’s financial intelligence unit.
“If you have four banks on the chain, that means there are multiple payments or hops connected from a transaction that was previously moved from A to B” as money flows between users, he said.
That increases the cost of transactions but also makes it harder for law enforcement to see them in a timely manner, he added. “There are so many banks in the world – they will find a new way to get around the sanctions,” he said.
According to financiers involved, Russian importers and exporters are also doing more business in rubles because of the difficulty of converting the currency into dollars and euros.
Traders buying Russian oil in India are now transacting in rubles after the US pressured banks in the United Arab Emirates to eliminate payments in dirhams, a senior Russian banker and former Russian oil executive said.
“This is a sanctions loophole,” the senior Russian banker said, adding that foreigners are allowed to buy rubles on the Moscow stock exchange to use them to settle payments with Russian counterparties. “These payments are easy to process because [foreign banks] can open correspondent accounts in rubles in Russian branches of foreign banks.”
He believes that the ruble “will become the main currency in the underbelly of Russia, because that is the only way to ensure it.” [the US Treasury’s Office of Foreign Assets Control] doesn’t 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 the “technology, construction, industrial and aviation” sectors would be made only in rubles.
The change was made “in accordance with Ofac requirements,” according to the statement, which was obtained by the Financial Times. Bank of Georgia did not immediately respond to a request for comment.
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According to the Russian Central Bank, cross-border payments are increasingly being settled in rubles, while the use of Chinese, Turkish and UAE currencies is declining. Before the 2022 war, less than 15 percent of Russian exports were paid for in rubles. But in February this year, the currency’s share rose to 40 percent, the highest increase since the US executive order.
On imports, payments in rubles have increased from a prewar level of 30 percent to about 40 percent.
However, the ruble’s limited convertibility makes it difficult for Russian banks and counterparties to make up for lost trading volume in dollars and other Western currencies, the senior Russian investor said.
“Even the friendliest jurisdictions like Kyrgyzstan are vulnerable. And you can’t take that much with you anyway because the capital of these banks is all so small,” said the investor.