On Wednesday, the U.S. Treasury Department announced a significant expansion of its secondary sanctions program against Russia. Any foreign financial institution engaged in transactions with sanctioned Russian entities will be viewed as directly cooperating with Russia’s military-industrial base.
This move will hinder financial institutions from countries like China in conducting business with Russia.
According to the Financial Times, there were reports that Russian President Putin proposed to Chinese leader Xi Jinping in May to strengthen ties between the financial sectors. However, due to Beijing’s concerns about secondary sanctions from the U.S., the proposal was ultimately not fulfilled.
In December of last year, an executive order issued by the White House authorized the Treasury Department to impose sanctions on foreign financial institutions supporting Russia’s military-industrial base.
A senior Treasury official stated that these sanctions will expand the number of sanctioned entities from about 1,200 currently to over 4,500.
In other words, the latest U.S. sanctions will cover nearly all sanctioned Russian entities, even those not directly supporting the conflict in Ukraine. This includes major banks such as the Russian Federal Savings Bank and VTB.
The Biden administration believes that after two years of Russia’s full-scale invasion of Ukraine, the Kremlin has transformed Russia into a war economy.
Treasury Secretary Janet Yellen stated, “We are raising the risks that financial institutions face in dealing with Russia’s war economy, eliminating evasion routes, weakening Russia’s ability to access foreign technologies, equipment, software, and IT services, and benefitting from them.”
Amid decreased trade activities related to the war, providing financing for cross-border trade has become riskier, even for banks with no direct connection to the U.S.
The Financial Times reported that Emily Kilcrease, a trade and sanctions expert at the New America Foundation, mentioned that the expanded secondary sanctions enhance the U.S.’s investigation capabilities, allowing for the sanctioning of actors not bound by U.S. laws.
“This means the U.S. can actually impose sanctions on people who are not bound by U.S. law,” she said. “This strengthens the legal basis for the U.S. to impose sanctions on Chinese banks assisting Russia’s war efforts. The Treasury Department hopes they take note of this. But at some point, it may require a real escalation and sanction one of them.”
By broadening the scope of secondary sanctions, the U.S. increases the risk for financial institutions from other countries engaged in business with Russia, especially China. Since Russia’s invasion of Ukraine, the relationship between Beijing and Moscow has grown closer.
Sources said that while China and Russia are discussing protecting a few Chinese banks engaged in transactions with Russian counterparts, the proposed relationship has not met Moscow’s demands. This indicates that Beijing is still concerned about potential secondary sanctions from the U.S.
Former White House senior director for international economics, Peter Harrell, considers the latest sanctions as a “paradigm shift,” partly due to the risk foreign banks face in being cut off from the U.S. financial system when dealing with major Russian banks.
“This is the first time the U.S. has shifted towards what looks like… an attempt at globally financial blacklisting of Russia,” Harrell said.
“The message being sent is essentially to banks outside the Group of Seven and other regions, such as China, Turkey, and the UAE, warning them of potential sanctions for continuing to transact with major Russian banks and other sanctioned Russian entities,” he added, stating that this may trigger a “mass exodus” of these banks from Russia.
He further explained, “This financial exodus might in turn… complicate the flow of goods to countries that continue to trade with Russia.”
According to the U.S. Treasury Department statement, the U.S. will also sanction critical parts of Russia’s financial infrastructure, including the Moscow Exchange (MOEX). The exchange operates Russia’s largest stock, fixed income, foreign exchange, and other publicly traded markets.
Within an hour of the U.S. taking action on Wednesday (a Russian public holiday), the Moscow Exchange hastily announced that the new sanctions compelled its main financial markets to immediately suspend trading in U.S. dollars and euros.