A recent clampdown by the US on banks facilitating trade supporting Vladimir Putin’s incursion into Ukraine has significantly hindered the movement of funds to and from Russia, claim senior western officials and Russian financiers.
The trade activity between Moscow and key partners like Turkey and China has plummeted in the first quarter of this year due to the US targeting international banks aiding Russia in acquiring essential products for its military campaign.
According to Western officials and three senior Russian financiers, a US executive order, enforced late last year, has led to banks severing ties with Russian counterparts and refraining from transactions in various currencies.
Anna Morris, deputy assistant secretary for global affairs at the US Treasury, stated, "It has become harder for Russia to access the financial services necessary to obtain these goods." She emphasized the goal of increasing obstacles and costs for the Russians, creating disruption in the system.
Navigating around these restrictions now demands an expanding network of intermediaries to evade regulatory scrutiny, even for transactions unrelated to Russia's military operations, noted officials and financiers. This maneuvering escalates currency conversion and commission expenses.
A senior Russian investor likened the situation to an escalating challenge, foreseeing a trajectory akin to that of Iran, alluding to the strict financial sanctions against Tehran.
The US executive order primarily targets banks in countries that experienced significant upticks in trade with Russia following the imposition of sanctions after Moscow's invasion of Ukraine.
Turkey, for instance, witnessed a substantial surge in exports of "high-priority" goods to Russia and neighboring countries post the invasion, which sharply declined in the first quarter of this year due to the executive order's impact.
US officials and experts underscored the American government's leverage over the financial sector, highlighting its ability to detect and penalize any wrongdoing, thus instilling fear among financial institutions.
The restrictions on payments extend beyond shadow trading in war-related components, as banks opt to sever entire categories of transactions with Moscow to avoid falling afoul of US sanctions.
Russian traders have turned to smaller banks and alternative currencies amidst the reluctance of major financial institutions in countries like Turkey and China.
Sanctions have significantly affected revenue streams, with commissions to middlemen on export transactions adding to the financial strain, as observed in the case of Norilsk Nickel metals group.
While larger financial institutions' retreat has disrupted trade, the proliferation of alternative channels for fund transfers poses a question of whether the trade will rebound.
The increasing complexity of transactions poses a challenge for Western regulators in tracking trade involving restricted goods, as Russian entities employ multiple intermediary transactions.
Russian importers and exporters are increasingly resorting to settling trades in roubles due to the challenges in exchanging currency for dollars and euros.
The rouble's ascent as a predominant currency in Russia's transactions underscores the evolving financial landscape shaped by sanctions and regulatory pressures.
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