Washington’s Banking Sanctions – Formal and Informal
Valentin KATASONOV | 30.07.2014 | OPINION

Washington’s Banking Sanctions – Formal and Informal

Summer 2014: a new round of banking sanctions against Russia

While introducing economic sanctions against Russia, the US is paying a great deal of attention to sanctions against Russian banks. The first sign was the decision to include Bank Rossiya on Washington’s blacklist, although the bank has not suffered as a result of America’s actions. Indeed, the bank has increased its profit over the last few months, despite the fact that Bank Rossiya has completely scaled down its international operations (its dollar operations, at any rate). 

The actions against Bank Rossiya are an example of targeted sanctions. In addition, Washington is threatening Russia with sectoral sanctions. With respect to banks, this means that all Russian banks would fall under restrictions, bans and/or penalties. For the time being, however, Washington has not announced sectoral sanctions against Russian banks. Reassuring reports have even cropped up in the Russian media on that score. There are no grounds for reassurances, however. 

The latest round of targeted sanctions was issued last week covering two new Russian banks, and much larger ones than Bank Rossiya. These are Gazprombank and VEB, and both are state-owned banks. The sanctions include bans on these Russian banks raising long-term (more than 90 days) financing from US companies and banks; they have also been refused the right to float new issues of their shares on the US stock market. It is difficult to say how much these sanctions will be felt. The rating agency Moody’s observed that the US sanctions will have a limited influence on VEB and Gazprombank due to the banks’ high liquidity and modest refinancing requirements in the international markets. There are some independent experts, however, who believe that Washington’s decision will affect the ranking of Russia’s entire banking sector. The heads of Gazprombank and VEB have refrained from publicly assessing the repercussions of the sanctions. 

According to the Deputy Chairman of the State Duma Committee on Financial Markets, Anatoly Aksakov, VEB, with the status of a public corporation, “will not feel any effects on its capital”, as it was recently decided to convert the National Wealth Fund (NWF) deposits into the bank’s capital. “The bank has sources to substitute foreign funding,” Aksakov observed. At the end of June, Gazprombank received €1 billion at 4% per annum in the foreign market, having sold bonds on the Irish Stock Exchange. The offering was managed by Credit Suisse, Deutsche Bank, GPB-Financial Services and SG CIB. Gazprombank has attracted liquidity from abroad much more than other Russian companies in the financial sector: the bank currently has 78 Eurobond issues on the market denominated in dollars, Swiss francs, euros, roubles and Chinese yuan. Despite the relative prosperity of the two banks at present, however, threats still exist. The very same NWF that was used to support VEB is partially invested (through Bank Rossiya) in US Treasury securities. And in that regard, Washington could strike a new blow, blocking Russia’s package of securities. Gazprombank will survive the closure of the American market, but the closure of the European market, which Washington is insisting on, would be critical for the bank. 

Washington is using the banking sector sanctions as a kind of bogeyman in the information war against Russia. This does not mean, however, that there is no threat to the Russian banking sector from the US. There are threats, and they are growing. There is now no longer any need for Washington to loudly declare sanctions in order to strike a blow at Russian banks. All Russian banks that carry out transactions in foreign currency (primarily in dollars) are under the Sword of Damocles of bans, arrests, fines, confiscations, freezes, blocks and so on. Such sanctions could be referred to as informal, and they are far more dangerous than formal sanctions.

The global bank management system

Over many decades, the US has created a global management system for banks and other financial organisations. 

The most important element of this system is the dollar. Since the dollar is used in the overwhelming majority of all international payments, these payments pass through the US banking system, and Washington is able to block them where necessary. 

The second important element of this system is Washington’s financial control of the banking systems in other countries. The control scheme works like this: the US Federal Reserve System (FRS) issues dollars, the first recipients of which are Wall Street banks (these are also the main shareholders of the FRS). The Wall Street banks then invest the money received both within the US and abroad. Investments abroad include the provision of loans to non-residents, investments in the debt securities of non-residents, and participation in the capital of foreign companies and banks. To punish a country, foreign company or bank as and when necessary, the highest US authorities issue a warning through the banks of the FRS to those foreign companies and banks under the financial control of the US. They can be referred to as Washington’s financial ‘fifth column’, capable of striking targeted blows at companies in the host country. They are also capable of destabilising the entire financial and economic sphere of the host country. 

The third important element of the global bank management system set up by the United States is the ideological justification for employing the capability of blocking the dollar transactions of foreign banks and financial organisations. Such blocking is carried out under the pretext of “protecting human rights”, “combating international terrorism”, “promoting democracy” and so on. In such cases, punitive actions can be carried out against other countries, foreign companies and banks without a formal declaration of sanctions.

FATCA - a new element of the global bank management system

The fourth element of the system, involving the direct administrative control of Washington, is being established before our very eyes. It is the FATCA law, the full name of which is the “Foreign Account Tax Compliance Act” (passed in 2010). The law obliges banks and financial organisations throughout the world to provide information on clients who fall into the category of “US taxpayer”. The law has extraterritorial effect, directly encroaching upon the sovereignty of other states. 

Coincidentally or not, the FATCA law has been in full force since 1 July 2014. From that moment, every Russian bank working with dollars found themselves under the Sword of Damocles of the US financial authorities. Punishing any Russian bank as and when required is not difficult, so Washington’s reports on the inclusion of certain Russian banks on its blacklist serve more to create background noise. Such background noise could even be useful for Russia as it will encourage the impending reform of Russia’s financial and banking system. FATCA is a far more powerful weapon of economic war against Russia than sectoral sanctions. If a bank refuses to cooperate with the US Internal Revenue Services and will not sign an agreement with it on performing the functions of a tax agent, then any transaction by that bank that passes through the US banking system will be subject to penalties. Specifically: 30 percent of the transaction amount will automatically be transferred to the US Treasury. After a while, the bank’s correspondent accounts in the US may be closed, which means that its operations will be completely blocked. A bank’s absence in the FATCA system means it will virtually become a pariah in the banking world. Nobody will risk providing it with loans, and international banking consortiums could demand the early repayment of loans previously obtained by such banks. 

Russian banks got ready to implement the FATCA law in good time, but hoped they would not have to cooperate with the US Internal Revenue Services directly. It was assumed that Russia would enter into a bilateral agreement with the US on FATCA, according to which the Russian tax service would act as an intermediary between the Russian banks and the US tax service. Events in Ukraine have changed everything, however, and Washington unilaterally broke off talks on the Russian-American agreement. Russian banks therefore found themselves face to face with the American tax service. To date, Sberbank has already spent several millions of dollars on training staff how to carry out the necessary procedures related to FATCA. The total amount spent on these kinds of measures throughout the Russian banking system is estimated to be tens of millions of dollars. However, neither sophisticated software nor superbly trained personnel can be a reliable guarantee or safeguard against the possible sanctions imposed against a bank by way of FATCA. And we have not even mentioned the fact that FATCA calls into question the institution of banking secrecy in Russia. 

Sanctions against European banks

Washington is not compiling a blacklist of European banks, but that in no way prevents it from fining European banks billions of dollars every year for carrying out operations for ‘pariah’ countries. Since 1 April 2009, American financial regulators have fined European banks 32 times totalling nearly $25 billion. Thus in 2012, one of Europe’s oldest credit organisations, Standard Chartered Bank, paid US federal authorities $327 million for violating US sanctions against Iran, Libya, Myanmar and Sudan between 2001 and 2007, and it also paid $340 million to New York regulators to remove similar charges. On 30 June 2014, the French bank BNP Paribas, which ranks fourth in the world in terms of assets and second in France, agreed to pay US authorities a record $9-billion fine. The bank’s management is charged with helping its Sudanese, Iranian and Cuban clients carry out dollar transactions banned by the US sanctions regime. In the coming months, giants of European banking like the German Kommerzbank and Deutsche Bank, French Credit Agricole and Societe Generale, and Italian Unicredit, among others, could also be subject to penalties. The reasons are the same – violating sanctions, and cooperating with banks in ‘pariah’ countries. It must be emphasised: some countries have the status of pariahs only in relation to US laws that establish unilateral sanctions. From the point of view of international law, they are not pariahs at all – there are no UN Security Council rulings on the issue. However, in the Western banking world, life has not been organised on the basis of international law for a long time, but on the basis of certain ‘notions’. In view of the hegemony of the dollar, European banks have to agree to the fines imposed by Washington so as not to suffer even greater losses: after all, the US can prohibit them from carrying out transactions in dollars and confiscate their assets in America (a right that the US president has). Such penalties are stipulated in the “International Emergency Economic Powers Act” passed in the US in 1977.

The Sword of Damocles of informal sanctions hanging over the banks of Russia

It is more than likely that the US will not officially introduce full-scale sectoral sanctions against Russian banks. Instead, Washington will put increasingly more pressure on European banks, calling for them to restrict or discontinue their cooperation with Russian banks and companies. The case of BNP Paribas has shown how obedient European banks are to Washington. In addition, by using the Foreign Account Tax Compliance Act that came into full force on 1 July 2014, Washington can ‘punish’ any Russian bank carrying out international settlements. Even without the events in Ukraine, the Russian banking sector would still have ended up under the Sword of Damocles of informal US sanctions. About that, there should be no illusions. 

Tags: European Union  Russia  US 

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