U.S. Sanctions Key Russian Banks, Yet Financial System Remains Accessible

The United States on Thursday sanctioned Russia’s third-largest bank, Gazprombank, the last major financial institution in the country that has escaped designation from Washington until now. While this action is significant due to Gazprombank’s key facilitation of Russia’s energy exports, the move comes as payments through the bank were already likely to slow as Europe reduces its imports of Russian gas and Ukraine prepares to shut off pipeline access from Russia beginning next year.

In addition to targeting Gazprombank, the United States simultaneously sanctioned more than 50 medium-to-small Russian banks, as well as more than 40 securities registrars that serve as key record-keeping components of Russia’s stock market infrastructure. Washington also warned foreign financial institutions against participation in Russia’s alternative to SWIFT, the Western-led global messaging system that allows banks to communicate with each other across borders. 

New Penalties Aim to Combat Sanctions Evasion — But Loopholes Remain

Since February 2023, Washington has boasted that more than 80 percent of Russia’s banking sector assets are under U.S. sanctions. Thursday’s action targeted even more of the sector, casting a wider net to combat Russian sanctions evasion. However, by the Treasury Department’s own admission, “[t]here remain a number of non-sanctioned Russian banks, subsidiaries of foreign banks, and money service businesses” that are free to continue operating business as normal and maintain connectivity to the Western financial system.

U.S. Warns Against Joining Russia’s SWIFT Alternative

In conjunction with its new sanctions package, the Treasury Department’s Office of Foreign Assets Control (OFAC) issued an alert highlighting the potential sanctions risk for foreign financial institutions that join Russia’s SWIFT alternative, SPFS, or are exposed to institutions that have joined SPFS. Specifically, OFAC warned that it is “prepared to more aggressively target foreign financial institutions” that join the Russian system in the future.

This alert constitutes a significant warning shot. The United States will now need to make good on its threat by aggressively targeting foreign banks that join SPFS and applying pressure on third-party financial institutions that have significant exposure to those that join. Moreover, questions remain as to whether any of the approximately 160 foreign banks already participating in SPFS will exit the messaging system and how Treasury will respond if they do not.

Comprehensive Prohibitions Targeting Russia’s Financial Sector Remain Necessary

The United States should more aggressively target Russia’s economy by prohibiting all dealings with Russian financial institutions, including their foreign subsidiaries and representative offices. At the same time, Washington should provide only limited authorization for dealings related to certain energy-related transactions that are strategically significant to the United States and its allies. Absent a prohibition, the United States should continue to designate foreign subsidiaries and representative offices of sanctioned Russian financial institutions and make clear to third countries the consequences of authorizing their operation.

The United States should pay particular attention to countries where sanctioned Russian financial institutions may be increasing their presence. For example, even though the United States sanctioned Russia’s largest privately held bank, Alfa-Bank, in April 2022, the institution announced plans earlier this year to open a representative office in India. This action would facilitate even greater trade between the two countries, with India already serving as Russia’s second-leading supplier of restricted technologies, such as microchips, circuits, and machine tools. Only China, which also continues to host several sanctioned subsidiaries of Russian banks, sends more restricted goods to Russia.

Max Meizlish is a senior research analyst for the Center on Economic and Financial Power (CEFP) at the Foundation for Defense of Democracies (FDD). For more analysis from Max and CEFP, please subscribe HERE. Follow Max on X @maxmeizlish. Follow FDD on X @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.