New US sanctions on Russian banks: Will they be effective

The material was prepared using official documents from the US State Department, the US Department of the Treasury, the White House, announcements from the Extraordinary and Plenipotentiary Ambassador of Ukraine to the US, Oksana Markarova, on social media, as well as comments from domestic economic experts and financial analysts.

On February 23, on the eve of the second anniversary of the full-scale war unleashed by Russia against Ukraine, the United States imposed another round of sanctions against the aggressor country. The current package of sanctions is the most extensive since the beginning of the Russian invasion in February 2022. A total of 484 legal entities, 57 individuals, and even 12 maritime vessels have been targeted by the sanctions.

The US Department of the Treasury imposed sanctions against nearly 300 entities from Russia and its affiliates.

The US State Department imposed sanctions on over 250 legal and natural persons.

The US Department of Commerce included over 90 Russian and affiliated companies in the list of trade restrictions.

Sanctions against the financial sector of Russia

The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury has imposed restrictions on the financial infrastructure of Russia, including the operator of the national payment system Mir and Russian banks, investment companies, and financial technology companies.

The sanctions target the Joint Stock Company National Payment Card System (NPCS), which is the state operator of the Russian National Payment System Mir. NPCS, owned by the Central Bank of Russia, plays a key role in facilitating financial transactions both within Russia and abroad. The dissemination of Mir by the Russian government has allowed Russia to build a financial infrastructure that enables it to circumvent sanctions and restore severed ties with the international financial system.

OFAC has imposed restrictions on nine regional banks in Russia, including several with headquarters in Russian military-industrial bases; five investment funds and venture capital funds seeking to promote the development of advanced technologies and industries of the next generation in Russia and attract domestic and foreign investments in Russian companies; and six financial technology companies providing software and IT solutions for Russian financial institutions.

The sanctioned banks include:

• Avangard Bank, headquartered in Moscow;
• Bank RostFinance, headquartered in Rostov-on-Don;
• Chelindbank, headquartered in Chelyabinsk;
• Bank International Financial Club, headquartered in Moscow;
• Modulbank, headquartered in Kostroma;
• Databank, headquartered in Izhevsk;
• Maritime Joint Stock Bank, headquartered in Moscow;
• Bystrobank, headquartered in Izhevsk;
• SPB Bank, headquartered in Moscow.

Next are investment firms and venture capital funds:

• BSF Capital, providing investment banking services, venture investments, fund management, and working with large assets;
• Investment Consultant Elbrus Capital, an investment company;
• Orbita Capital Partners, an asset management company;
• Investment and Venture Fund of the Republic of Tatarstan, providing loans and grants and financing technological and industrial projects;
• Guard Kapital, investing in Russian information technology companies.

Also, Russian fintech companies:

• Financial Information Systems, developing information systems for the financial sector;
• Quorum, developing financial software;
• Crypto Pro, developing cryptographic software and solutions for public key infrastructure;
• Faktor TS, software and hardware for cryptographic information protection;
• Practical Security Systems, developing software for security systems;
• Validata, developing and manufacturing secure corporate information systems.

Sanctions overview

As a result of the imposition of sanctions, all property owned by sanctioned legal and natural persons, which is located in the United States or under the ownership or control of US persons, is blocked. Additionally, any organizations that are owned (directly or indirectly) by 50 percent or more by one or more sanctioned individuals are also blocked.

All transactions by US persons or within (or transiting through) the United States, involving any property or interests in property of sanctioned individuals, are prohibited unless authorized by a general or specific license from OFAC. These prohibitions include, among others, the transfer of any funds, goods, or services to or for the benefit of a sanctioned person, as well as the receipt of funds, goods, or services from a sanctioned person.

Furthermore, foreign financial institutions conducting or facilitating significant transactions or providing any services related to Russia's military-industrial sector risk falling under OFAC sanctions. Examples of activities that may expose foreign financial institutions to sanctions risk include maintaining accounts, transferring funds, or providing other financial services (such as payment processing, trade financing, insurance) for the benefit of sanctioned legal and natural persons.

Will US sanctions be effective: perspectives from Ukraine and the truth from Russians

Sanctions are like a game of chess. When faced with US sanctions, Russians devise circumvention schemes. However, as past practice has shown, sanctions significantly complicate and raise the cost of circumvention schemes and can also greatly impact delivery times.

Therefore, all packages of sanctions can be considered effective, as they evolve along with the Russian response to them.

"The most interesting effect will be the impact of sanctions on non-Russian companies that helped Russians bypass sanctions in finance, oil transportation, and the supply of military products," says former member of the National Bank of Ukraine Vitaliy Shapran.

In particular, the current package of sanctions will affect the operation of the Russian SPB Exchange and its dealings with non-Russian issuers. For example, the exchange's depository handles settlements for issuers from China listed on the Hong Kong Stock Exchange. In the event of secondary sanctions, the SPB Exchange's dealings with foreign issuers will be suspended.

As reported by Russian Interfax, the SPB Bank has been under US restrictions since November 2, 2023, when sanctions were imposed on its parent company, the SPB Exchange. "Thus, after today's (as of February 23) decision by OFAC, the sanction status of the SPB Bank has not changed, but the legal grounds for its inclusion in the sanctions list have changed," explained a representative of the settlement depository of the SPB Exchange.

Following the imposition of sanctions against the SPB Exchange last year, trading in foreign securities on the exchange was suspended, and investors' assets worth about $3 billion were frozen. As the exchange explained, foreign counterparties suspended their interaction with the trading platform due to fears of liability for violating the US sanctions regime, including the imposition of secondary sanctions.

Conclusions about the effectiveness of American sanctions against the Russian financial sector can be drawn from this...

When it comes to the Russian payment system Mir, the sanctions essentially act as a pre-emptive measure, according to Olexandr Parashchiy, head of the analytical department at investment company Concorde Capital. It's known that Russia intended to widely use Mir for international settlements, particularly with counterparts in Asian countries.

However, the imposition of sanctions effectively removes this payment system from the international legal arena. This leaves Russia with fewer options for conducting international payments.

It's important to understand that the Mir payment system is primarily used by cards issued by Russian banks. This has allowed Russians to continue using payment cards freely in some countries south of their homeland, feeling somewhat modernized. But the imposition of US sanctions will mean that banks in countries friendly to Russia will start more cautiously assessing the risks of dealing with Russian payment cards. This, in turn, will have a significant psychological impact on the average Russian, who is "apolitical."

Regarding sanctions against Russian investment companies investing in the technological sector, it's important to recognize that this sector in Russia is increasingly self-contained. Therefore, current sanctions may not have a significant impact on the development of Russian technologies due to restrictions on investment companies financing sector development.

However, secondary sanctions against countries and entities helping to create infrastructure for bypassing international restrictions by Russia could prove to be more effective, as experts have repeatedly emphasized.

At the same time, Ukrainians and their partners worldwide should not be deceived about the potential impact of any sanctions on Russia. The impact will undoubtedly be there. But it won't be immediate. The "success story" of all previous sanction packages by America and Europe against Russia is evidence of this. So, miracles are unlikely to happen this time either.

Sanctions are not a panacea. They only help weaken the potential of the aggressor country to finance further conduct of its expansionist war, which Ukrainian armed forces are poised to win. However, Russia constantly finds new ways and schemes to bypass international restrictions. Against this backdrop, the sanctions themselves often come too late and are partial, which does not yield the desired effect. So, it's too early to relax. And wearing "rose-colored glasses" is not advisable.