FT: This is a sanctions loophole. This is real freedom of trade

A US crackdown on banks financing trade in goods has made it much more difficult to move money in and out of Russia, according to senior western officials and Russian financiers.

But!

Cross-border payments are increasingly being carried out in roubles, while the use of the Chinese, Turkish and UAE currencies are declining, according to Russia’s central bank. Before the 2022 war, less than 15 per cent of Russian exports were paid in roubles. But the currency’s share rose to 40 per cent in February this year, ‘The Financial Times’ has to admit.

Moscow’s trade volumes with key partners such as Turkey and China have slumped in the first quarter of this year after the US targeted international banks helping Russia acquire critical products to aid its war effort.

“It has become harder for Russia to access the financial services that it needs to get these goods,” said Anna Morris, deputy assistant secretary for global affairs at the US Treasury.

Getting around the restrictions now requires a growing network of middlemen to avoid regulatory scrutiny even if the transactions have nothing to do with Russia’s war machine, the officials and financiers said, while increasing currency conversion and commission costs.

“It’s getting harder and harder every month. One month it is dollars, the next month it is euros; within six months you basically won’t be able to do anything. The logical endpoint of this is turning Russia into Iran,” said a senior Russian investor, referring to strict financial sanctions against Tehran.

Russian traders have turned to smaller banks and alternative currencies as major banks in countries such as Turkey and China shy away.

Traders selling goods to Russia, including restricted goods, are less likely to be deterred than banks, said Jane Shvets, a partner and sanctions expert at US law firm Debevoise & Plimpton.

“The pullback of larger financial institutions has disrupted the trade, but the question is whether it will bounce back as these ‘shadier’ alternatives for moving money proliferate,” she said.

The increasingly complex transactions risk confounding western regulators hunting trade in restricted goods as Russian entities and their counterparties add more transactions separating buyer and seller, said Matis Mäeker, head of Estonia’s financial intelligence unit.

That is increasing the cost of transactions, yet also making it harder for enforcement authorities to see them in time, he added. “There are so many banks in the world — they will find a new way to bypass the sanctions,” he said.

Traders buying Russian oil in India are now conducting transactions in roubles after the US pushed banks in the United Arab Emirates to stamp out payments in dirhams, said a senior Russian banker and a former Russian oil executive.

“This is a sanctions loophole,” said the senior Russian banker, adding that foreigners are permitted to buy roubles on the Moscow Exchange for use in payment settlements with Russian counterparties. “These payments are easily processed because [foreign banks] can open correspondent accounts in roubles at the Russian branches of foreign banks.”

He believes the rouble will become “the main currency in the underbelly of Russia, because that’s the only way to make sure that [the US Treasury’s Office of Foreign Assets Control] does not see it”.

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