The writer is head of the centre for financial crime and security studies at the Royal United Services Institute think-tank
In February 2022, I compared the UK’s first round of sanctions against Russia and the Putin regime to taking a peashooter to a gunfight. The threat of sanctions failed to deter Vladimir Putin’s full-scale invasion of Ukraine and their early imposition was slow and lacked bite. Western leaders were initially poor at articulating their ambitions — which ranged from “degrading and disrupting” Russia’s supply chains to “shaking” the foundations of its economy. But they are now restricting Moscow’s access to the international financial system and applying ever-greater trade restrictions.
While the tempo of sanctions designations has remained high, and the targets have broadened, the coalition of countries implementing sanctions has not. The holes in the net are significant and manifold. Too many countries are at best ambivalent and at worst profiting from providing sanctions circumvention opportunities for the Kremlin and its proxies.
The recent US warning that Russia is trying to repair its degraded military industrial supply chains by getting around western export controls was a welcome one. The Financial Action Task Force (FATF), the global watchdog on financial crime, has also drawn attention to the risks posed to the financial system by Russia’s activity, such as its reported arms trades with other sanctioned jurisdictions. But this signalling presupposes that countries ignoring allied sanctions are inclined to agree with the view of the FATF (or the US). The UK and the EU do, but those countries providing circumvention opportunities for Russia are far less diligent, and indeed some rail against the FATF, seeing it as hypocritical.
Far better than relying on uninterested states to react to a process or guidance they already disregard, is to pressure their companies. While the UAE, Turkey and South Africa may choose to ignore sanctions decisions made in Washington, London and Brussels, the interconnected nature of global trade means their companies and financial institutions cannot: they need connections to international partners and are thus sensitive to the signals they receive.
For example, a bank in a non-compliant country that continues to offer financial services to designated companies or individuals will almost certainly require access to the international financial system. This access is most often provided by large, globally-operating banks located in the US, Europe or the UK that are required to implement sanctions to the letter. These correspondent banks must at the very least increase their scrutiny of these client banks, and if necessary sever their relationships altogether to avoid facilitating circumvention. Harnessing influence to coerce sanctions compliance in this way may seem distasteful, but so too is facilitating the funding and resourcing of Moscow’s war machine.
Beyond their direct connections with third country financial institutions, these global banks also facilitate trade finance payments and should be alert to changes in their corporate clients’ activities since the Ukraine invasion. In particular, they should interrogate companies which have increased business with the countries — such as Armenia, Kazakhstan and Turkey — that are acting as trade “cut-outs”, in effect helping Russia to evade sanctions.
Finally, those companies in countries that facilitate sanctions circumvention — such as the Iranian provision of drones to Russia — must themselves be added to the designation lists, to restrict their access to western markets. This has the added benefit of signalling to companies in compliant countries that dealing with these less scrupulous actors poses significant risks.
It was encouraging to see some efforts in this direction as part of the renewed western sanctions imposed on the first anniversary of Russia’s invasion. But there is still more that could be done — starting with better domestic implementation of sanctions in allied countries and more robust diplomatic engagement to reverse the progress Russia has made in blunting international support for sanctions.
There is no doubt that Ukraine’s allies have learnt lessons from their lacklustre sanctions response to Russia’s annexation of Crimea in 2014 and have come a long way from their tentative start last year. But as the Kremlin adapts and disguises its supply chains and financial connections, the west will need to assess and adjust its activities accordingly. On second thoughts, maybe there is no shame in taking a peashooter to a gunfight — as long as it is suitably nimble.