Tag Archives: financial sanctions against Russia

Co-Dependent Enemies: US Sanctions and the Russian Titanium

Ttitanium tube containing the Russian flag, in the Arctic seabed 2007

The United States imposed sanctions on Russia’s state arms export agency and four defense industry enterprises for alleged violations of international arms control regimes restricting export of nuclear and missile technologies to Iran, North Korea and Syria on Wednesday.

A notice posted on the U.S. government’s Federal Register on the State Department’s behalf on September 2, 2015 said the move was a response to violations of the Iran, North Korea and Syrian Nonproliferation Act (INKSNA).  The act prohibits the transfer of goods, services and technologies restricted under international arms control agreements such as the Missile Technology Control Regime to Iran, North Korea and Syria.

A spokesman from the U.S. Embassy in Moscow, Will Stevens, told The Moscow Times that the Russian entities sanctioned under the act were among 23 foreign entities — including firms and entities based in China, Turkey and the United Arab Emirates — found to be engaging in violations of arms export conventions.

Russian arms export agency Rosoboronexport said it was unable to comment on the issue at this time.  The Russian defense industry firms that were involved in the alleged INKSNA violations were fighter jet manufacturer MiG, the high-precision weapons maker Instrument Design Bureau (KBP) Tula, NPO Mashinostroyenia — a rocket and missile design bureau in Reutov, outside Moscow — and Katod in Novosibirsk, which makes night-vision optics, among other things. The sanctions prevent any U.S. companies or government agencies from doing business with the sanctioned Russian arms entities.

The U.S. did not specify which arms deals in particular triggered the latest sanctions actions imposed on Russia’s defense industry…

Vadim Kozyulin of the Moscow-based PIR Center think tank argued that the imposition of sanctions under the Iran, North Korea and Syria Non-Proliferation Act was politically motivated …Kozyulin speculated that the arms transfers in question are deliveries to Syrian President Bashar Assad’s embattled regime, or the expected future delivery of advanced S-300 air defense systems to Iran — which, he pointed out, is not prohibited by any United Nations resolutions governing arms sales to Iran…

Russia’s largest arms export partners are nations such as China, India and Algeria…“This is not the first time that the U.S. has imposed sanctions on Russian defense companies,” Kozyulin noted. “I used to compile a list of such cases and I guess that you can count about 40 to 50 times when Russian companies were sanctioned by the U.S. since 1998.”…

However, Yury Barmin, an independent Russian expert on the global arms trade, said that “some Russian companies may import spare parts from the U.S. and the latest sanctions may force them to revise their procurement strategies and delay some outstanding orders.”…
Russians responded to the timing of the U.S. decision to place sanctions on 23 global entities for alleged INKSNA violations by accusing Washington of pursuing and protecting its own interests in the global arms market. Barmin argued that Wednesday’s sanctions were only implemented after the completion of a Pentagon contract with Rosoboronexport to deliver 30 Russian-built Mi-17 helicopters to the Afghan military in the wake of NATO’s withdrawal.“Now that this deal has been concluded the U.S. deemed it possible to impose sanctions,” he said.

The CEO of Russian defense firm Katod, which was producing night-vision goggles for sale on the U.S. market, told  that his company was sanctioned because the U.S. feared Russian competition in this segment of the arms market….

Barmin too pointed to the lack of contact with U.S. financial institutions and argued that existing measures will have little impact, “unless Rosoboronexport [is] prevented from performing banking transactions globally, which would imply cutting Russia off from SWIFT altogether.”

If the tit-for-tat game of sanctions with Russia continues, and the U.S. manages to cause significant damage to the Russian defense industry, Kozyulin pointed out that Russia holds certain trump cards that it could use to fight back at the U.S. defense industry.  “For example, Russian titanium,” which is used for Boeing aircraft, “and engines for space rockets might be prohibited for export to the U.S.”

Excerpts from Matthew Bodner, U.S. Sanctions Russian Arms Export Agency for Non-Proliferation Violation, Moscow Times, Sept. 2, 2015

Sanctions against Sanctions: Sovereign Financial Systems, Russia

Visa

International payment operators Visa and MasterCard have started processing domestic payments inside Russia’s new national processing system, launched in response to U.S. sanctions against Moscow that saw cards from several Russian banks blocked in 2014. Observers see the creation of the National Card Payment System as the first step towards an autonomous financial system in Russia.

“The national system has already been introduced, quickly and at a little cost, and it has fully resolved the problem of payments inside the country,” says Sergei Khestanov, professor of finance and banking at the Russian Presidential Academy of National Economy and Public Administration.  If Visa and Mastercard do not fulfill the requirements of the Central Bank, they will have to pay a security deposit, whose size will be linked directly to the turnover of the credit card systems. Morgan Stanley estimated the figure at $950 million for Visa and $500 million for MasterCard.

According to Khestanov, processing Visa transactions through the national system should be viewed as a compromise: The Russian government’s control of the transactions will strengthen, but the international systems will continue to operate in Russia.  “The potential of the development of the Russian cashless payment market is still enormous,” explains Anton Soroko, an analyst at Finam Investment Holding.,,,For the time being, experts are avoiding any clear-cut predictions of success, and say that Visa’s protocols are more complex than MasterCard’s. “We will see if this will be successful only after the infrastructure assumes the full burden,” says chief analyst at UFS IS Ilya Balakirev.

The next stage should be the Russian national payment system’s issuance of plastic cards, which is slated for December 2015.The picture is further complicated by the emergence of Asian operators as an alternative to western payment systems. Immediately after the introduction of sanctions against Russia by the U.S., the Chinese bank card system UnionPay entered the Russian market in April 2014, followed in March 2015 by Japan Credit Bureau (JCB). By 2017 Russia is planning to issue about two million UnionPay cards and three million JCB cards.

Excerpts from Alexei Lossan, Visa and MasterCard join Russia’s National Card Payment System, Russia Beyond the Headlines, Apr.  2, 2015

Financial Sanctions Against Russia and Iran: the use of SWIFT

Swift

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment.  SWIFT is not an international organization.  It is instead a cooperative society under Belgian law and it is owned by its member financial institutions…

But the network’s very usefulness means it is increasingly being cast in a new role, as a tool of international sanctions. In 2012 it was obliged, under European law, to cut off access for Iranian banks that had been subjected to sanctions by the European Union. Now there are calls for Russian banks to be banned from SWIFT in response to Russia’s invasion of Ukraine.

A group of American senators is arguing for the measure, which could be inserted into a broader bill on sanctions against Russia that has a good chance of being passed in the next session of Congress. The European Parliament passed a resolution in September calling on the EU to consider mandating a cut-off…European governments are divided, with Britain and Poland among the keenest.

The earlier SWIFT ban is widely seen as having helped persuade Iran’s government to negotiate over its nuclear programme. The ban was one of the first sanctions Tehran asked to be lifted, points out Mark Dubowitz of the Foundation for Defence of Democracies, a Washington-based think-tank. Though some of the banks blocked from SWIFT managed to keep moving money by leasing telephone and fax lines from peers in Dubai, Turkey and China, or (according to a Turkish prosecutor’s report) by using non-expelled Iranian banks as conduits, such workarounds are a slow and expensive pain. And the sanctions prompted Western banks to stop conducting other business with the targeted banks.

The impact of a reprise on Russia’s already fragile economy would be huge. Its banks are more connected to international trade and capital markets than Iran’s were. They are heavy users not only of SWIFT itself but also of other payment systems to which it connects them, such as America’s Fedwire and the European Central Bank’s Target2. Kommersant, a Russian newspaper, has reported that more than 90% of transactions involving Russian banks cross borders.

Foreign firms that do business in Russia would suffer, too. Countries that trade heavily with Russia, such as Germany and Italy, are therefore none too keen…

SWIFT’s own rules allow it to cut off banks involved in illegal activity, and it has occasionally done so. But if it ends up being used frequently for sanctions, it could come to be seen as an instrument of foreign policy…Already there are calls for it to be used in other conflicts: pro-Palestinian groups have recently sought for Israel’s banks to be shut out, for instance. And as China’s economic clout grows, might it want Taiwanese banks excluded?

Another risk is that using SWIFT in this way could lead to the creation of a rival. Russia’s central bank is pre-emptively working to develop an alternative network; China has also shown interest in shifting the world’s financial centre of gravity eastward. Earlier this year it co-founded a BRICS development bank with Russia, India, China and South Africa, and its UnionPay service, set up in 2002, has loosened the stranglehold of MasterCard and Visa on card payments. If China and other countries that feared being subjected to future Western sanctions joined the Russian venture, it might become an alternative to SWIFT—and one less concerned with preventing money laundering and the financing of terrorism…

America’s current crop of senior Treasury officials are similarly cautious, despite being vocal proponents of sanctions in general. SWIFT is a “global utility”, says one, and using it for sanctions should be “an extraordinary step, to be used in only the most extraordinary situations”. Blocking access to SWIFT, he frets, could mean that traffic shifts to networks that are less secure and easier to disrupt—and thus make life easier for criminals and cyberterrorists, including those in rogue governments. Against those who threaten global security, a SWIFT ban is a powerful and proven weapon. But it is also a risky one.

Financial Sanctions: The Pros and Cons of a SWIFT Response, Economist,  Nov. 22, 2014