The Case For Stopping Russia Sanction-Busters – Analysis

By Stephen J. Blank and Mark Temnycky

(FPRI) — When Russia launched its full-scale invasion of Ukraine in February 2022, the international community quickly came together to condemn the aggressor. United Nations resolutions denounced the military incursion. Over 100 countries across the globe have consistently spoken out against the Russian war since it began, but many of them are violating the Western sanctions on the Kremlin, buying Russian energy resources, and selling goods and services.

Still, the international community did not just talk—it imposed stiff penalties on Russia. The Russian Federation was expelled from the Council of Europe and suspended from the United Nations Human Rights Council. Furthermore, several Russian companies, government officials, and oligarchs were sanctioned. Several politicians and oligarchs also had their assets frozen or seized. Finally, numerous countries have banned exports to Russia, reduced Russian gas imports, and reduced or ended their business relationships with Russia. Numerous Russian banks were removed from SWIFT, the global monetary banking system. As a result, the Russian Federation has lost billions of dollars, and the Russian economy has been under significant strain.

Yet, these losses were not enough to end the war. Russia can still sustain its war machine, even paying for North Korean troops to assist with the fighting. This is because multiple companies and banks are undermining the impact of international sanctions on Russia.

The European Union, the United Kingdom, the United States, and other Western actors maintain normal trade relations with most neutral countries across the globe. This has created an opening for Russia as some countries in South America, Africa, and Asia serve as third-party intermediaries, re-exporting Western goods and services to Russia. Many restricted goods, including dual-use items and other forms of equipment, are being sent to Russia from these countries, providing Russia with the material and equipment it needs to continue its invasion of Ukraine.

To streamline this process, Russia uses intermediaries to sell its crude oil, which ends up in gas tanks everywhere including the United States. Countries like India, Turkey, and the United Arab Emirates purchase oil from the Russian Federation. This information is publicly available. Companies such as India’s Reliance Industries, Turkey’s STAR Refinery and Tupras Refinery, and the UAE’s Amur Trading FZCO import Russian crude that is then blended with other crudes at purchaser oil refineries. The mixed substance is refined into gasoline and sold worldwide, allowing Moscow to profit.

All of this would be impossible without a sophisticated system of financial facilitation. Banks from former USSR countries—still heavily dependent on Russia in everything from energy supplies to security—are natural suspects. For example, when the full-scale invasion began, financial institutions such as Kazakhstan’s Kazpochta, Uzbekistan’s Kapital Bank, Kyrgyzstan’s Kompanyon Bank and MBank, and Armenia’s Ardshinbank continued doing business with Russia, primarily through the Russian money-transfer company Unistream. These financial institutions suspended their operations with Unistream after the United States imposed sanctions on the currency transfer company in July 2023.

Not all have heeded warnings about sanctions. For example, banks in Kyrgyzstan, which is heavily dependent on Moscow, continued their business openly with the Russian Federation until this past summer when additional sanctions announced by the Biden administration persuaded a number of them to finally announce that they would be cutting ties with Russia. When the full-scale invasion of Ukraine began, Kyrgyzstan mysteriously increased its trade relations with Western entities. At the same time, international financial transactions from Kyrgyzstan to Russia also increased. Current reporting indicates that Kyrgyzstan may still be involved in sanctions evasion. This includes dual-use goods, vehicle parts, and other equipment from China used by the Russian military for its invasion of Ukraine.

Similarly, recent reporting indicates that Kyrgyzstan continues to help keep Russia’s energy sector going. For example, reporting on September 30, 2024, Euronews quoted Irina Tsukerman, president of Scarab Rising, a security strategy advisory firm, “Russia is managing its energy exports, primarily oil and gas in various forms, using Kyrgyzstan as an effective trade hub to circumvent sanctions and get the fossil fuels into Europe.” One of the banks suspected to be involved in facilitating business with Russia is Kyrgyz MBank, which reportedly belongs to the country’s former Prime Minister Ömürbek Babanov. This bank was reported as receiving payments from buyers of Russian oil and partnering with Russian banking organizations such as Sberbank, which has been sanctioned by the US and the EU. The bank has also been working with the Russian card processing center Kartstandard, part of the Center of Financial Technologies (CFT), which was sanctioned by the US Office of Foreign Assets Control (OFAC) in August 2024.

MBank finally announced that it had suspended direct transactions with Sberbank and other sanctioned Russian entities only in mid-August 2024. However, the flows of payments were fully restored in less than a week with the help of intermediaries. MBank is reportedly working with one of Sberbank’s trusted intermediaries, Bank 131. Sberbank advises its clients that it makes payments to MBank and brags on its official website that wires could be made to any bank in Kyrgyzstan.

South Korean Kookmin Bank, one of the key correspondent banks for Central Asian financial institutions, has decided to cease dollar SWIFT transfers with MBank, along with 20 other regional banks suspected of facilitating Russia’s sanctions evasion. However, it is estimated that at least five other international correspondent banks, including Pasha Yatirim Bankasi in Turkey, Mashreqbank in the UAE, and Landesbank Baden-Württemberg in Germany, continue to work with Kyrgyzstan despite the reputational and legal risks. MBank and four of its corresponding international banks have been contacted to comment on this article but failed to respond at the time of the publication. Landesbank, in an emailed response, declined to comment citing “banking secrecy” but insisted it “consistently complies with all applicable regulations.”

In the context of sanction-busting business schemes, Central Asian banks like MBank are obviously just small fry. Extending secondary sanctions to those working directly with Russia is essential but may prove insufficient. For Western sanctions to have a real impact, they will need to increase pressure on the larger international partners of these smaller banks and firms and take additional measures to prevent financial facilitation of Putin’s war machine.

MBank is not the only institution undermining these sanctions. In fact, OFAC recently announced new sanctions on prominent organizations that are helping Russia undermine international sanctions. The listincludes companies from countries such as India, China, Hong Kong, Switzerland, Thailand, and Turkey. Sanctioning these businesses will put additional pressure on their decision to aid Russia, and this will help bring a quicker end to Russia’s ongoing war in Ukraine. In other words, Western collective action is the only way to impose real economic costs on Russia and, thereby, make progress toward ending the Russian invasion and restoring international order.

About the authors:

• Dr. Stephen J. Blank is Non-Resident Senior Fellow at FPRI’s Eurasia Program. 
• Mark Temnycky is an accredited freelance journalist covering Eurasian affairs and a nonresident fellow at the Atlantic Council’s Eurasia Center. He can be found on X @MTemnycky.

Source: This article was published by FPRI