Western authorities need the help of financiers to keep money flowing to Russia


When Western companies fled Russia after the invasion of Ukraine, banks and insurers joined the exodus. They feared being prosecuted in criminal courts for violating sanctions and in the court of public opinion for filling Vladimir Putin’s war chest. The West’s economic shock and awe campaign has largely isolated Russia from the international financial system.

But recently Western officials have emphasized that they want money flowing into parts of the Russian economy, and financial companies want to make that happen. On November 14, the US, UK and EU issued a statement clarifying that the sanctions are aimed at Russia’s war machine, not the food or fertilizer industries. Diplomats have since repeated the message, making sure the sanctions don’t work too well.

Western governments have a knack for threading a needle. They want to deprive Russia of war funds and prove their anti-Putin ploy, but they also want to minimize the collateral damage. “When you impose sanctions, ambiguity is your best friend. It’s your worst enemy if you try to tailor it to the needs of the global economy,” says Adam Smith of Gibson Dunn, a law firm.

The renewal of a grain deal between Russia and Ukraine, which allows food through Ukraine’s ports, explains the recent pressure. To get Moscow to join, officials tried to show they were not blocking Russia’s food and fertilizer exports, which make up 14% and 18% of the global volume. A State Department official says the US “does not want to hinder developing countries’ ability” to purchase these goods.

The problem is that politicians and activists have not understood the message. In September, members of Congress denounced the owners of JPMorgan Chase and Citibank, two U.S. banks, for doing business with Russian oil and gas companies, despite the guidelines the Treasury allowed. Juan Zarate, the architect of the US sanctions following the September 11 attacks, said: “Corporate concerns about transparency, accountability and integrity have grown exponentially.” ESG requirements only add to the burden.

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Even before ESG, financiers were extremely reputation-conscious. They also know that politics can change. In 2016, then-Secretary of State John Kerry toured Europe to encourage banks to do business in Iran after the US lifted sanctions. The bankers, alarmed by the Republican opposition, stormed the roadshow. It was wise: Donald Trump later reintroduced the sanctions.

Western efforts to maintain cash flows to parts of Russia’s agriculture and energy sectors have worked reasonably well so far. The authorities have issued guidelines for exemptions. They’ve also interacted with compliance teams to be honest about the industry and written “letters of comfort” where appropriate. Russian wheat exports are now back to near-normal levels and world food prices are at a nine-month low.

But the cost of fertilizer remains high, which means more security will be needed in the future. Rebecca Grinspan of the UN trade department warned that bankers’ fears of ‘reputational risk’ are still leading to higher export costs. On November 21, the Netherlands finally released 20,000 tons of Russian fertilizer that had been stuck in Rotterdam due to a lack of clarity about sanctions. It is a peculiarity of modern sanctions regimes that authorities have to wait for money to flow into their enemy’s economy.

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Read more about our recent coverage of the crisis in Ukraine.




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