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The United States has warned countries with trading ties to Russia that they risk secondary sanctions if they allow Russian banks to set up local branches to finance supplies to President Vladimir Putin’s military.
The move is aimed at containing tactics Russia has used in the past to evade sanctions, particularly using unclear methods to pay for dual-use goods needed to build weapons for its invasion of Ukraine.
Deputy Treasury Secretary Wally Adeyemo told the Financial Times that Washington was prepared to pursue countries that allowed Russian banks to set up branches in their jurisdictions to evade Western sanctions, even if the banks themselves were not subject to sanctions.
“We will not only go after the branches they are setting up but also other entities and companies in our jurisdiction that collaborate with them,” Adeyemo said.
“This is not just a warning against doing business with subsidiaries or branches of entities that are already under sanctions,” he added, saying countries should block the establishment of Russian branches or subsidiaries “because they will be used to evade the sanctions that our coalition has put in place.”
The move is the latest in a series of rule changes aimed at thwarting Russia’s imports of sensitive war-related materials by making banks around the world wary of being involved in financing the trade.
A White House executive order issued in December 2023 warned foreign financial institutions that they risked secondary sanctions if they conducted or facilitated transactions related to the Russian military-industrial complex. The list of targeted entities was expanded in June to include Russian entities subject to sanctions.
The threat is said to have caused serious problems for Russia in financing the import of sensitive goods, and according to official trade data, exports of the most important war-related goods to Russia from China and Turkey have fallen dramatically following the order.
Chinese exports of so-called “high priority” items — a set of exports that the United States and its allies have particularly tried to block — fell to $212 million in February from $421 million in December.
Adeyemo said Russia continues to struggle to find payment routes for goods following recent U.S. sanctions against companies such as VTB Bank Shanghai, the only representative office in China of a Russian bank that the U.S. blacklisted in June.
After the U.S. decision, VTB CEO Andrey Kostin acknowledged that Russia had been struggling to find new loopholes before the U.S. closed the old ones.
“We’ve noticed that no matter what steps we take, the reaction from the West is extremely swift,” Kostin said at the July conference. “No matter where we are or what we do, immediately a delegation of 10 people shows up and starts beating up local authorities to try to stop us.”
“The situation is getting worse every day, but we are still working on it and supplies are flowing,” Costin said.
Adeyemo said the United States was shifting its focus to smaller banks in new countries after an earlier round of pressure prompted large financial institutions in countries such as China, Turkey and the United Arab Emirates to cut ties with Russia.
Russia is working with countries that resent U.S. financial dominance, including China and Iran, to build an alternative payments system that is strong enough to withstand Western pressure.
Chinese Premier Li Qiang and Russian Prime Minister Mikhail Mishustin pledged after their meeting in Moscow on Thursday to “ensure the smooth and proper functioning of payment channels,” including encouraging the use of the yuan and ruble for more transactions, opening more correspondent accounts in their respective countries and supporting closer cooperation between the two countries’ financial systems.
But Adeyemo said most big banks have succumbed to Western pressure because the West dominates global finance. “Banks do much more business with the US, EU, UK and other allies than they do with Russia,” he said. “They don’t want to lose access to dollars, euros, pounds and yen.”
