Recently, officials from the White House in the United States have issued intensive warnings to China about facing new sanctions for supporting Russia. The United States is working with its European allies to explore ways to increase efforts to combat financial intermediaries that help Russia evade sanctions.
According to Bloomberg, citing sources familiar with the matter, the Group of Seven (G7) and the European Union are considering measures to target third-country financial intermediaries that utilize Russia’s financial messaging system, SPFS (Russia’s version of SWIFT), to evade sanctions.
For a long time, the G7 has prioritized preventing Russia from acquiring weapons and crucial technology for weapon production. However, Moscow circumvents restrictions by importing prohibited goods through third countries such as China, Turkey, the United Arab Emirates, and countries in Central Asia. This often requires a network of intermediaries to evade oversight and scrutiny.
In 2014, during the invasion of Crimea, Russia created its own financial messaging system, SPFS, as an alternative to the U.S.-dominated SWIFT (Society for Worldwide Interbank Financial Telecommunication) to reduce dependence.
In February of this year, Russia was fully banned from using SWIFT. In response to sanctions, Russia is actively expanding the use of SPFS. The Russian central bank stated that currently there are 159 foreign financial institutions from 20 countries connected to SPFS. In the first quarter of 2023, the business volume of SPFS was four times higher than the same period in 2022.
In January of this year, Russian news agencies reported that less than 10% of global transactions bypass the SWIFT system, including Russia’s SPFS, China’s CIPS, Iran’s SEPAM, and India’s SFMS established in 2001, which refused to connect with Russia’s SPFS.
In December of last year, President Biden signed an executive order to sanction foreign banks that support Russia’s attack on Ukraine, and financial institutions helping Russia evade sanctions could also be targeted for sanctions.
This has increased the difficulty of funds entering and leaving Russia. In the first quarter of this year, trade volume between Russia and major partners like Turkey and China declined.
Last month, Deutsche Welle (DW) reported that some Chinese manufacturers are finding it increasingly difficult to export products to Russia. This is because major Chinese banks, concerned about U.S. sanctions, restrict payments for such transactions.
Now, at the urging of the United States, European allies are actively studying how to combat financial institutions that facilitate Russia’s evasion of sanctions. At the G7 summit in Italy in June, heads of state are expected to reach consensus on a series of measures to better implement sanctions against Russia.
Bloomberg reports that the EU’s goal is to reach a comprehensive agreement before the G7 summit, but some EU member states oppose a complete ban on SPFS, fearing that it could jeopardize legitimate transactions and damage relationships with third countries.
Other measures being discussed include proposing to sanction third-country banks that assist Russia in evading sanctions, increasing legal requirements for companies to inspect their subsidiaries and supply chains, and imposing sanctions on more individuals and entities from third countries.