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The U.S. Treasury Department has significantly expanded its secondary sanctions program against Russia and will now treat foreign financial institutions that do business with sanctioned Russian companies as if they were doing business directly with the Kremlin’s military-industrial base.
The new set of measures would expand a White House executive order issued in December that gave the Treasury Department the authority to impose secondary sanctions on foreign financial institutions if they were found to be acting for or on behalf of any of the roughly 1,200 entities the U.S. government considers to be part of Russia’s defense sector.
This week’s changes, announced on Wednesday, will increase that number to more than 4,500, covering nearly every Russian entity already sanctioned for reasons other than its direct support for the war in Ukraine, including banks such as Sberbank and VTB, Russia’s largest financial institutions.
The expansion of secondary sanctions reflects the U.S. view that the Kremlin has transformed Russia into a war economy two years after its full-scale invasion of Ukraine.
“We are increasing risk to financial institutions involved in Russia’s war economy, eliminating avenues for tax evasion, and reducing Russia’s ability to benefit from access to foreign technology, equipment, software and IT services. Every day Russia continues to mortgage its own future to continue its unjust war against Ukraine,” Treasury Secretary Janet Yellen said.
U.S. authorities believe that the December executive order has made third-country banks reluctant to do business with high-risk Russian clients.
By the start of 2024, the inflow of war-related imports into Russia had decreased as financing the cross-border trade of such goods became more risky, even for banks without ties to the United States.
“Secondary sanctions are intended to expand the US’s ability to pursue sanctions evasion by actors that have no legal connection to the US. It essentially means the US can enforce sanctions against people who are not subject to US law,” said Emily Kilcrees, a trade and sanctions expert at the Center for a New American Security think tank.
Russian President Vladimir Putin appointed nationalist technocrat Andrei Belousov as defense minister last month in a shakeup of his security chiefs that the Kremlin said was aimed at making Russia’s record 10.8 trillion rubles ($120 billion) defense budget more efficient and less vulnerable to Western sanctions.
By broadening the scope of secondary sanctions, the United States would increase risks to financial institutions in other countries that do business with Russia, particularly China, which has grown closer to Moscow since its invasion of Ukraine.
During an official visit to Beijing last month, Putin urged his Chinese counterpart, Xi Jinping, to strengthen cooperation between the two countries’ financial sectors, according to people familiar with the matter.
China and Russia are in talks to isolate a small number of Chinese banks that do business with Russian counterparts, but the scope of the proposed ties falls short of Moscow’s demands, indicating concerns remain high in Beijing about possible U.S. secondary sanctions, the people said.
“This could be seen as strengthening the legal basis for the U.S. to impose sanctions on Chinese banks that have supported Russia’s war efforts. The Treasury Department is hopeful that they will take notice, but at some point they may need to actually escalate and impose sanctions on one of them,” Kilcrees said.
“I think our primary focus is on Chinese companies that have been systematically involved in providing support to Russia. We’re also looking closely at financial institutions,” Deputy Secretary of State Kurt Campbell told reporters last month.
The Treasury Department announced the new sanctions designations in tandem with the expansion of secondary sanctions. The newly listed companies include Moscow Exchange, Russia’s largest operator of stocks, bonds, derivatives, foreign exchange and money market products. The Treasury Department said this follows measures announced by President Putin intended to attract capital to Russia from “friendly countries” through the exchange.
Additional reporting by James Politi
