Russian Companies Active in Syria at Risk of U.S. Sanctions

Syrians walk past an election campaign poster for president Bashar al-Assad reading in Arabic "Together more powerful" on May 18, 2014 in the capital Damascus. Photogapher: Louai Beshara/AFP via Getty Images Close

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Syrians walk past an election campaign poster for president Bashar al-Assad reading in Arabic "Together more powerful" on May 18, 2014 in the capital Damascus. Photogapher: Louai Beshara/AFP via Getty Images

The Obama administration may conclude that the road to Donetsk leads on to Damascus.

What started as a campaign to punish Vladimir Putin for annexing Crimea and menacing eastern Ukraine could morph into a larger effort to increase pressure on the Russian leader by imposing sanctions on Russian companies supporting the regime in Syria.

The first such move related to the Syria conflict came May 8, when the U.S. Treasury targeted OAO Tempbank and a senior bank executive, saying the Russian institution “has provided millions of dollars in cash and facilitated financial services to the Syrian regime.” Following sanctions on 45 individuals and 19 business entities over Ukraine, the Tempbank designation signaled the Obama administration is looking for more pressure points to influence Russia’s behavior.

“The Russian-Syria nexus is a target-rich environment for potential Treasury designations,” said Mark Dubowitz, executive director of the Washington-based Foundation for Defense of Democracies, a non-profit group that focuses on national security issues. “Given the strong cooperation between Moscow and Damascus, there are clearly strong economic links.”

The latest sanctions, coming amid tensions over Ukraine, marked a change from previous U.S. policy in Syria that aimed at cooperating with Russia. The Syrian conflict has led to the deaths of at least 160,000 people and made refugees of more than 2 million as rebel opposition groups seek to topple the regime of Syrian President Bashar al-Assad.

Photographer: Louai Beshara/AFP/Getty Images

Supporters of the Syrian government wave Syrian and Russian flags and portraits of President Bashar al-Assad as a convoy carrying Russian Foreign Minister Sergei Lavrov heads towards the presidential palace in Damascus on February 7, 2012. Russia has used its veto power at the UN Security Council four times to protect the Assad regime. Close

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Photographer: Louai Beshara/AFP/Getty Images

Supporters of the Syrian government wave Syrian and Russian flags and portraits of President Bashar al-Assad as a convoy carrying Russian Foreign Minister Sergei Lavrov heads towards the presidential palace in Damascus on February 7, 2012. Russia has used its veto power at the UN Security Council four times to protect the Assad regime.

Russian Diplomacy

Two rounds of peace talks in Geneva, brokered by the U.S. and Russia, ended without any agreement. The two countries also worked together to get United Nations inspectors to tally and destroy Syria’s chemical weapons. Meanwhile Russia, which maintains a military base at the Syrian port of Tartus, has used its veto power at the UN Security Council four times to protect the Assad regime.

Russia says its goal isn’t to keep Assad in power, but to keep Syria secular, independent and intact.

“Some of these engagements for action may not have been as effective as hoped,” said Amit Sharma, who served as chief of staff and senior adviser to Robert Kimmitt, who was deputy Treasury secretary during the George W. Bush administration. “One can interpret U.S. sanctions efforts on Russian companies related to Syria as reflecting the lack of Russian government efforts, and perhaps exacerbated by their actions in Ukraine.”

Analysts including Howard Mendelsohn, a managing director at the Camstoll Group in Washington, say Tempbank probably isn’t the only Russian company helping the regime.

“There’s reasonable likelihood that sanctions policy makers and intelligence analysts are looking at other Russia targets, which could include individuals, businesses, defense companies or banks that are implicated in supporting the Assad regime,” said Mendelsohn, who was previously an acting assistant secretary at the Treasury’s Office of Intelligence and Analysis.

Isolating Assad

“Designating Russian companies active in Syria contributes to the isolation of the Assad regime and you can argue that at the same time such actions contribute to the increasing uncertainty with respect to business dealings with Russia,” he said.

Among institutions that have been tied publicly to Syrian commercial and arms deals are Moscow-based ZAO Novikombank and Vnesheconombank, according to the Camstoll Group, which advises companies and governments on sanctions, illicit-finance, regulatory and national security issues.

Four U.S. senators last year wrote to Treasury Secretary Jacob J. Lew urging him to crack down on Vnesheconombank, as well as Russian banks VTB Group and OAO Gazprombank, for carrying on “business as usual” with Syria. The letter was signed by New Hampshire Republican Kelly Ayotte, Connecticut Democrat Richard Blumenthal, Texas Republican John Cornyn, and New Hampshire Democrat Jeanne Shaheen.

Strict Accordance

Vnesheconombank serves as the Russian government agent in settlements with Syria, according to an e-mailed statement from the bank, also known as VEB. The bank “doesn’t cooperate with any Syrian companies” and its activities are “in strict accordance with sanctions” approved by the European Union and the United Nations, according to the statement.

VTB Group and Gazprombank said in e-mailed statements that they don’t conduct business with Syrian organizations. Novikombank didn’t respond to an e-mailed request for comment.

Russia “continued to openly supply arms to the Syrian government throughout the period 2011-2014,” primarily via state-run arms trading firm Rosoboronexport, according to Pieter Wezeman, senior researcher at Stockholm International Peace Research Institute in Solna, Sweden. “It is estimated that Russia was the most important supplier to Syria, with air defense systems and anti-ship missiles constituting the most valuable items delivered.”

Never Stopped

Rosoboronexport spokesman Vyacheslav Davidenko said the company has “never stopped our cooperation with Syria, although it’s been scaled down since the war began. It’s conducted in strict accordance with UN Security Council resolutions and international norms.”

Total sales of Russian goods to Syria reached $2.9 billion between 2011 and 2013, according to the Moscow-based Russian statistical office.

The U.S. has information about an increase in “the quantity and the quality” of Russian arms flows to Syria, Assistant Secretary of State Anne Patterson said on March 26.

Assad’s army started using longer-range Russian Smerch and Uragan rockets for the first time in February, according to Jane’s Defense Weekly and Stratfor, a U.S. geopolitical research company. Syria has also intensified the use of MiG-29 fighter jets with ground-attack capabilities, Stratfor said, citing analyses of video footage.

If the U.S. aims at maximum impact, it should go after the Russian military industry that supplies the Assad regime, Tony Badran, a research fellow at the Foundation for Defense of Democracies, said in an e-mail.

“The type of action the administration is taking, such as the sanctions against one Russian bank and one Russian bank official, seems to be more in line with its broader approach to Syria, which is ‘to send a message’ to the Assad regime, that it has to return to the negotiation table,” Badran said.

To contact the reporter on this story: Kasia Klimasinska in Washington at kklimasinska@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Mark Rohner, Gail DeGeorge

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