April 2 (Bloomberg) -- JPMorgan Chase & Co. blocked a payment from a Russian embassy to an affiliate of a U.S.- sanctioned bank, a decision described as “illegal and absurd” by the Foreign Ministry in Moscow.
The biggest U.S. bank thwarted a remittance from the Russian embassy in Astana, Kazakhstan, to Sogaz Insurance Group “under the pretext of anti-Russian sanctions imposed by the United States,” the ministry said yesterday in a statement on its website. Sogaz is part-owned by OAO Bank Rossiya, a St. Petersburg-based lender facing U.S. sanctions over the Ukrainian crisis, according to its website.
Interfering with the transaction was an “absolutely unacceptable, illegal and absurd decision,” Alexander Lukashevich, a ministry spokesman, said in the statement.
U.S. President Barack Obama announced the action against Bank Rossiya last month as part of a broadening of sanctions that targeted government officials and allies of Russian President Vladimir Putin, whose associates own Rossiya. The embassy’s transaction was for less than $5,000 dollars, a person with knowledge of the dispute said, asking not to be identified because such transfers aren’t public.
“Any hostile actions against the Russian diplomatic mission are not only a grossest violation of international law, but are also fraught with countermeasures that unavoidably will affect activities of the embassy and consulates of the U.S. in Russia,” Lukashevich said.
Putin’s move to annex Crimea in March triggered Russia’s worst conflict with the U.S. and Europe since the Cold War. It prompted Obama and the European Union to impose sanctions on individuals, while the Group of Seven industrialized nations threatened Russia with economic sanctions.
The blocked payment is a misunderstanding that can and probably will be resolved, a Sogaz official, who asked not to be identified, citing the sensitivity of the issue, said by text message. The insurer shouldn’t come under sanctions as Bank Rossiya doesn’t have controlling ownership or a board majority at Sogaz, the official said.
A wholly owned unit of Bank Rossiya reduced its stake in Sogaz to 48.5 percent from 51 percent on March 11, according to regulatory disclosure on the insurer’s website. That was nine days before the U.S. added Bank Rossiya and its billionaire shareholder Yury Kovalchuk to an extended sanctions list.
U.S. companies are advised to act with caution and make their own risk assessments when a sanctioned individual or company holds a significant stake of less than 50 percent in a business or controls it by other means, said a Treasury official who asked not to be identified, citing department policy.
JPMorgan could still process the embassy payment if U.S. regulators approve, the person familiar with that dispute said.
“As with all U.S. financial institutions that operate globally, we are subject to specific regulatory requirements,” New York-based JPMorgan said in a statement. “We will continue to seek guidance from the U.S. government on implementing their recent sanctions.”
Russia’s Finance Ministry has done business with JPMorgan. It picked the lender to improve the country’s standing among U.S. credit-rating firms. Putin said in 2011 the rankings given to Russia were an “outrage” that increased borrowing costs for domestic companies and the government. JPMorgan also was among banks selected to advise Russia on a 1 trillion ruble ($28.5 billion) privatization program.
JPMorgan earned $56 million in investment-banking fees in Russia in 2013, according to data compiled in January by Freeman & Co., a New York-based consulting company. That lagged behind only state-controlled VTB Capital and Sberbank CIB, which earned $101 million and $58 million, respectively, the data show.
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