US Treasury Expands Russia Sanctions to Foreign Banks, Technology Goods to Combat ‘War Economy’

World leaders from more than 90 countries gathered in Switzerland over the weekend in an attempt to reach a consensus in condemning Russia’s unwarranted invasion of Ukraine while pursuing peace for the war-battered Eastern European region. Ukrainian President Volodymyr Zelenskyy has voiced his goals of garnering increased international attention on the issues at hand, in addition to potentially reaching an agreement around a proposal to end the war that could ultimately be presented to Russian leaders. With reports from the far East indicating that Russian President Vladimir Putin has not ruled out such an agreement – so long as multiple guarantees are made to benefit his jurisdiction – there remains a glimmer of hope that the ongoing military conflict between these two global powers may ultimately see a resolution now nearly 2.5 years after Russia’s invasion of Ukraine initially began.

To spur more rapid progress in this regard, the United States Treasury Department announced last week their plans to once again ramp up economic sanctions on the Kremlin, seeking to further constrict any available avenues for financing their wartime efforts. The new set of measures will widen a White House executive order announced in December 2023 which gave the Treasury the authority to apply secondary sanctions on foreign financial institutions if they were found to have acted in favor of, or directly on behalf of, roughly 1,200 entities deemed by the US government to be part of Russia’s defense sector.¹ While seemingly robust, previous sanctions against Russia brough forth by the U.S. and their international counterparts have ultimately done little to deter the Kremlin from continuing their military campaign against Ukraine. Analysts believe this set of secondary sanctions however will expand their reach significantly, specifically in their ability to improve America’s ability to pursue sanctions enforcement on entities who aren’t otherwise subject to U.S. law.  Many large banks have already pulled out of their dealings with Russia as a result of the last wave of sanctions, but Russia has since shifted to using much smaller financial institutions with weaker compliance departments, as well as utilizing cryptocurrency outlets as a workaround to existing measures. As such, smaller banks and regional financial service providers appear to be the most at risk for being targeted by Russian entities and thus will continue to be hit with penalties for compliance failures. Small financial institutions must be even more vigilant now that this latest wave of sanctions is going into effect.

In addition to the aforementioned moves against foreign financial institutions, the U.S. Treasury also announced on the eve of the G7 summit in Italy last week that new sanctions were being placed on over 300 additional individuals and entities to cut off Russia’s access to products and services needed to sustain military production for its war in Ukraine, including dozens of Chinese components suppliers. Russia is in desperate need of access to semiconductors, optical equipment, software and other technologies in order to grow and maintain their advanced weapons systems in the event of further escalation of the war – as well as potential developments should the respective military forces of other international bodies ultimately rally against the Kremlin. Many of the sanctions targets in these secondary measures are third-party electronics suppliers in China, the Middle East, Africa, Europe, and the Caribbean who had not been previously warned against dealing with Russian entities. President Putin may have seen this potential uptick coming however, this as Russia changed the hierarchy of defense personnel by naming economist Andrey Belousov as the country’s new defense minister in May, while also realigning national priorities to make defense spending more efficient and less vulnerable to western sanctions. Time will tell if this re-shuffling will pay off for Moscow. Still, U.S. Secretary of the Treasury Janet Yellen believes that tightening the screws on Russia’s technology and service supplies will hamper them enough to stop the war.

“Russia’s war economy is deeply isolated from the international financial system, leaving the Kremlin’s military desperate for access to the outside world,” said Secretary Yellen. “Today’s actions strike at their remaining avenues for international materials and equipment, including their reliance on critical supplies from third countries. We are increasing the risk for financial institutions dealing with Russia’s war economy and eliminating paths for evasion, and diminishing Russia’s ability to benefit from access to foreign technology, equipment, software, and IT services. Every day, Russia continues to mortgage its future to sustain its unjust war of choice against Ukraine.”¹

The new measures also come at a pivotal moment for Ukraine, this as Russian forces continue to advance against near-depleted Ukrainian units. Ukraine however continues to receive significant financial aid from the United States and other countries, with Norway pledging approximately $103 million to help repair the country’s energy infrastructure and secure the country’s electricity supply damaged by Russian attacks on the national power grid. The United States also pledged to provide another $1.5 billion in assistance to the country to help keep it afloat, bringing the grand total provided in military assistance by the U.S. to Ukraine to nearly $53 billion since 2022. 

Rounding out these sweeping sanctions are measures being taken against Russia’s energy sector and their associated revenue streams. Reuters writes Russia has three major liquefied natural gas (LNG) projects that they are working to bring online: Obsky LNG, Artic LNG 1, ad Artic LNG 3. The sanctions now include several construction firms, equipment suppliers, ship-building firms, and LNG vessel operators that are working on these projects.³

Even if the new sanctions are successful in slowing Russia’s ongoing military efforts however, there is always additional risk that comes from making another nation financially desperate. There is hope that a potential resolution can be reached between the parties at hand, but it will require significant ongoing international cooperation and a major paradigm shift on behalf of Russia to see this through peacefully.

Citations

1. “As Russia Completes Transition to a Full War Economy, Treasury Takes Sweeping Aim at Foundational Financial Infrastructure and Access to Third Country Support.” U.S. Department of the Treasury, 12 June 2024.
2. Cook, Chris, and Max Seddon. “US Unveils Tougher Russia Sanctions for Foreign Banks.” Financial Times, 16 June 2024. 
3. Lawder, David. “US Treasury Widens Sanctions to Curb Russia’s War Production | Reuters.” Reuters, 12 June 2024.