Bearing Down on Russia
New Sanctions New Pressure
The Russians, since they started their war in Ukraine in February 2022, have been bragging that their economy is doing just fine despite the sanctions imposed on them by global powers, blocking them from some of the most critical parts of the global economy. Russian president Putin continues to gloat, “We have growth, and they have decline… They all have problems through the roof, not even comparable to our problems.”
Putin’s ignorant vatniks and those unable or unwilling to comprehend sanctions policy have been crowing that sanctions have failed to hobble Russia’s economy, even though that was not even remotely the goal. The New York Times has climbed in bed with Russian propaganda, publishing numerous articles about the failure of international sanctions.
Because Russia’s economy is growing, they claim, sanctions policy has failed.
Russia has mobilized its economy toward wartime production - all geared toward sustaining Russia’s war in Ukraine. War economies are deceptively robust, and as long as the war continues, so does economic growth. So what happens when the war ends?
The Russian economy is already starting to overheat, and the war is having a significant effect on Russia’s economy.
As I mentioned in earlier articles, Russia will likely devote 40 percent of its national budget toward its war, and analysts say the rest of the economy will not fare well.
Sectors like education and healthcare suffer accordingly as more resources are poured into the war effort.
The Bank of Finland says the economic growth touted by Putin is coming from “relatively low-technology branches such as manufacturing of fabricated metals, where Russia is less reliant on imports and thereby less affected by Western sanctions.”
“The current focus on military production has diverted resources from Russia’s civilian industries, making it more difficult to rely on branches that typically form the backbone of advanced economies to provide long-term growth.”
In turn this has worsened problems such as labor shortages and inflation.
And let’s not forget that Russia is losing vast amounts of vessels and war machinery, as well as more than a half a million troops to this effort. Something will give, and it will happen relatively soon.
Sanctions against Russia are wide-ranging, including designations for interference in US and foreign elections, cyberattacks, violations of human rights, high-level corruption, support for Syrian president Bashar al-Assad, and Moscow’s continued invasion and illegal annexation of Ukrainian territories.
The United States and global partners have imposed embargoes, frozen the assets and imposed travel bans on thousands of Russian individuals, limited financing and other economic activity using sectoral sanctions, imposed strategic trade controls and secondary sanctions, and prohibited professional services to Russia, such as accounting, legal advisory, trust and company formation services, management consulting, and most recently, IT consultancy and design services and IT support services and cloud-based services for enterprise management software and design and manufacturing software, based on recommendations from the Yermak-McFaul group from earlier this year.
The EU also enacted a ban on provision of specialized financial messaging services to Russian and Belarussian banks via the Society for Worldwide Interbank Financial Telecommunication—or SWIFT. Russia’s VEB and VTB, Bank Rossiya, Sberbank, Promsvyazbank, and a number of others are barred from the world's leading provider of secure financial messaging services. The Russians have tried to create their own version of SWIFT, the SPFS (Sistema peredachi finansovykh soobscheniy or System for Transfer of Financial Messages), but they’ve been pathetic at implementation, and since Russian media in January reported that the number of countries participating in the Russian Central Bank’s SPFS has increased to 20 from 16 in Q3 2023, you can be sure that 1) the number is a lie and 2) no one cares because the participants carry exactly zero weight in the global financial system.
The latest tranche of US designations, aside from sanctioning Russian individuals, entities, and vessels, and implementing a prohibition on the provision of IT services to Russia, did something else. Treasury declared that any entity designated pursuant to EO 14024 is part of Russia’s pivot to a wartime economy, and therefore subject to secondary sanctions. Per EO 14114, signed in December, any foreign financial institution conducting significant and continued transactions with Russia’s military-industrial sector can be sanctioned, regardless of whether a US nexus is present.
The EO had a magnificent effect, with at least two state-owned banks in China reexamining their relationships with Russian entities, and financial institutions in Turkey, which is working to get off the FATF grey list of jurisdictions under increased monitoring for AML regime deficiencies, are also increasing their scrutiny of transactions linked to Russia.
The latest action doesn’t just require extra due diligence to determine whether a client or potential partner is linked to Russia’s military-industrial sector. Is an entity linked to Russia’s state-owned arms company Rostec? Is it a military contractor?
No, this action declares that the thousands of entities and individuals sanctioned pursuant to EO 14024—and there are thousands of them, including IT firms, financial institutions, and other companies—are part of Russia’s military-industrial sector because Moscow has completed its pivot to a wartime economy.
Therefore, if a foreign financial institution transacts with Russia’s major IT firm Positive Technologies, sanctioned pursuant to 14024 in April 2021, its major banks, such as Sberbank or Alfa Bank, robotics research entities, real estate firms, ship yards, energy companies, etc., it can be subject to secondary sanctions. If a Russian firm is designated under EO 14024, which sanctions any Russian entity or individual involved in foreign malign activities, it is considered part of the war economy and the military-industrial complex.
Full stop.
The new US designations have also caused an immediate suspension of trading in dollars and euros on Russia’s Moscow Exchange.
The move means banks, companies and investors will no longer be able to trade either currency via a central exchange, which offers advantages such as better liquidity and oversight.
Instead, they will have to trade over the counter, where deals are conducted directly between two parties. The central bank said it would use data from those trades to set official exchange rates.
Many Russians hold savings in dollars or euros, mindful of periodic crises in recent decades when the ruble has crashed in value. The central bank reassured people these deposits were secure.
In addition, G-7 leaders issued a strong warning to China, accusing Beijing of supporting Russia’s war against Ukraine, transferring dual-use materials to Russia that can be used to prop up Moscow’s war machine. The mere threat of secondary sanctions after EO 14114 was signed in December caused several major Chinese banks to limit their cross-border transactions involving Russia and Chinese companies that continue their trade with Russia moving to smaller banks or underground financing channels that have less exposure to the global financial system. The United States, in its last package of sanctions designated seven China-based companies—another stark signal that the West won’t hesitate to act.
And in a direct shot across China’s bow, Treasury Secretary Janet Yellen this week came right out and said it: "I’m certainty not going to say that we would not be willing to designate a large bank if we saw systematic violations… The largest banks in China really, really value their correspondent banking relations."
The West is bearing down on Russia, sick and tired of Moscow’s continued aggression against Ukraine, the murder of civilians, the rape of women and children, the kidnapping and “russification” of Ukrainian kids, the targeting of civilian infrastructure and other war crimes committed by Russia. Even so, we’re not seeing an embargo of Russia as a whole from the United States, EU, and UK, almost certainly because embargoing the world’s 11th largest economy would have global repercussions.
It appears that reducing Russia’s resources that help it conduct its war is still preferable for now, and at least some in the EU are frightened about the effect on European firms. But the pressure on Russia is increasing, so how long before a full embargo is on the table?
My 'real' concern is what happens when the Russian economy truly collapses and Putin has to 'deal' with it. He has nuclear options that have already been threatened, and I, for one, can see him using them as a last ditch effort to recreate the USSR by any means (or as a dying gasp).