More than a year and a half into the war between Russia and Ukraine, regulatory bodies around the world continue to impose sanctions against Russia’s leading banks, companies and members of its business elite in an attempt to cripple the country’s $1.78 trillion economy and undermine its ability to fund the conflict.
These swiftly evolving regulatory changes have significantly increased the burden on financial institutions and global businesses. With sanctions remaining an important tool in the West’s fight against Russia moving forward, risk management and compliance teams need to closely monitor trends in the following key areas:
Enforcement of The Oil Embargo
The oil and gas industry has long been a mainstay of the Russian economy, making it a key target for Western sanctions regimes. Oil price caps and a ban on Russian oil product imports are part of a coordinated strategy by G7 countries to limit Moscow’s ability to fund the war in Ukraine. However, evasion efforts through several channels have undermined the embargo on Russian oil.
China and India have emerged as major buyers of Russian oil, with figures from the International Energy Agency suggesting these two countries alone accounted for as much as 50% to 80% of the oil exported by Russia in July and August 2023. Governments also have concerns about a shadow fleet of tankers transporting Russian oil potentially purchased above the $60 per barrel price cap imposed by the G7. Typically owned by an opaque network of shell companies, these vessels are now prohibited from European ports as part of a new effort to crack down on illicit sales of Russian oil.
The European Union’s 11th package of sanctions against Russia, which went into effect in June 2023, focuses on tightening loopholes in existing rules. As oil exports continue to reinforce Russia’s economic resilience and the Kremlin finds new ways to circumvent the restrictions, organizations should anticipate further actions targeting Russia’s most important revenue source.
Against this backdrop, risk and compliance professionals need to remain vigilant to Russia’s successful adaptation to sanctions and closely examine ownership structures to ensure they are not inadvertently supporting or doing business with organizations and vessels trading in Russian oil.
Escalating Export Controls and Secondary Sanctions
Despite Russia being subjected to some of the strictest sanctions ever imposed, investigative journalists have reported many instances of Western goods continuing to enter the country. It is therefore likely that governments will enact increasingly stringent export controls intended to undercut Russian military supplies.
Earlier this year, the United Kingdom announced export bans on “every item Russia has been found using on the battlefield to date,” including “aircraft parts, radio equipment, and electronic components that can be used by the Russian military-industrial complex, including in the production of unmanned aerial vehicles.” The European Union and United States took similar measures to introduce sale, export and transit restrictions on potentially sensitive dual-use goods. As regulatory bodies counteract suspected efforts to obtain sensitive technology for military use through civilian supply chains, more scrutiny is likely.
A wave of secondary sanctions is imminent in light of growing concerns about Russia funneling imports through neighboring countries like Kazakhstan, Turkey, Uzbekistan, China and India. Until now, the unilateral sanctions against the Kremlin have largely discouraged other countries from handing weapons to Russia for fear of being hit with retaliatory sanctions.
However, as more reports emerge of sensitive goods like computer chips and lasers being rerouted into Russia, regulators are increasing their focus on combating circumvention. The latest EU sanctions package, for example, introduced a new mechanism to ban the export of goods to countries suspected of circumventing sanctions if they substantially increase their purchases of banned goods that eventually flow to Russia. Other countries may follow suit.
In the wake of increased trade controls regarding Russia, global corporations need to conduct deeper due diligence on relationships across the value chain. Businesses should continuously monitor both suppliers and customers, particularly in countries with known connections to Russia, to protect themselves from both regulatory and reputational threats.
Fresh Sanctions for Evasion Facilitators
Early in the Ukraine crisis, the European Union and United Kingdom amended their sanctions rules to ensure they would apply to as many Russians as possible, including the business elite. Despite thousands of designations against them, many oligarchs and members of the Kremlin’s inner circle continue to operate in the West through a network of financial fixers, family members, offshore trusts and shell companies. Further complicating the situation, the Russian government is not requiring certain companies to disclose their shareholders and subsidiary information if they are already sanctioned or if the disclosure would be likely to result in additional sanctions.
Russian oligarchs are also turning to sanctions-neutral jurisdictions to shelter their assets. The U.K.’s National Crime Agency and Office of Financial Sanctions Implementation list the United Arab Emirates, Turkey, China, Brazil, India and the former Soviet Union (excluding the Baltic states and Ukraine) as jurisdictions where designated individuals and their facilitators may seek to transfer their assets.
While there is no legal requirement for these countries to implement unilateral sanctions imposed elsewhere, Western nations are increasing pressure to take action against activities that aid Moscow’s war effort. Regulated firms need to ensure that robust due diligence processes are put in place with regard to the Russian elite and their facilitators as governments continue to crack down on these individuals.
The Need for Effective Risk Controls
Moving into 2024, governments are intensifying their efforts to deprive Russia of the funds, goods and equipment needed to wage its war on Ukraine. With “sanctions fatigue” starting to set in, regulatory bodies are sharpening their focus on closing loopholes and combating sanctions evasion to bolster the effectiveness of their sanctions programs.
In this highly volatile environment, counterparty management has taken on greater significance for risk and compliance professionals. Given the variety of sanctions evasion techniques currently being deployed, businesses will need to build sophisticated and holistic due diligence processes for sanctions screening. After all, any connection, however indirect, to blacklisted companies poses a substantial legal risk. It will also be critical for risk professionals to have access to effective compliance tools and timely, trustworthy data to keep up with the pace of change and mitigate the risk of significant financial and reputational damage.