U.S. May Block More Russian Banks If Ukraine Cease-Fire Falters

The U.S. government is considering whether to shut one or more Russian banks out of the world financial system if rebels backed by Russia continue to violate the cease-fire in Ukraine, two administration officials said.

Putting a Russian bank on the U.S. Treasury’s “specially designated national” list would be a major escalation of the economic pressure the U.S. is exerting on Russia to stop supporting the separatist rebels who’ve seized parts of eastern Ukraine. The action would bar U.S. citizens, residents and companies from dealing with the sanctioned banks and allow the U.S government to freeze any assets in American jurisdiction.

The impact, however, would be global. Foreign banks with significant business in U.S. dollars would be reluctant to risk running afoul of the restrictions, just as they were after the U.S. fined France’s BNP Paribas SA nearly $9 billion last year for violating sanctions against Iran, Cuba and Sudan.

“An SDN listing for any Russian bank that does serious business with the West -- and has correspondent and other banking and financial relationships -- would be a devastating blow,” said Juan Zarate, a former Treasury Department and White House official, who is now chairman of the consulting company Financial Integrity Network.

Both officials who discussed the sanctions deliberations said that blocking additional Russian banks would be a significant escalation and could create large repercussions, particularly in European economies. Such a move isn’t imminent, they cautioned, unless the Russian-backed rebels renew their offensive before a March 19 European Union summit.

The Obama administration blocked OAO Bank Rossiya in March 2014, calling it the “personal bank” of Putin’s inner circle.

While Ukraine signaled today that the latest attempt at peace in its easternmost regions is taking hold, U.S. military and intelligence officials assess that Russian President Vladimir Putin will continue to arm and support the Ukrainian separatists, with their next target possibly being the port of Mariupol on the Sea of Azov or Kharkiv, the country’s second-largest city. The officials spoke on the condition of anonymity because the intelligence assessments were classified.

Transatlantic Unity

If the rebels make a move to seize either city, both officials said, some additional sanctions are almost inevitable, although they said the U.S. administration hopes to continue acting in concert with the European Union.

U.S. Secretary of State John Kerry and European Union President Donald Tusk, a former Polish prime minister, warned this week that new sanctions could be imposed.

The most extreme measure under consideration by President Barack Obama’s administration is shutting banks out of the Western financial system entirely, said two other U.S. officials, who requested anonymity because the policy discussion aren’t public.

“This would add a powerful economic hit longer-term,” said Robert Kahn, a former Treasury official who’s now a senior fellow for international economics at the Council on Foreign Relations in Washington.

“Russian Calculation”

However, Kahn said he didn’t think additional sanctions would affect Putin’s short-term decision-making.

“Eventually, I do believe it’ll change the Russian calculation,” Kahn said. “But there is a disconnect between the political and economic timelines, given the way we do sanctions.”

The U.S. is unlikely to issue any new restrictions before the meeting of the EU heads of state next month, the officials said. The existing American sanctions have no expiration date, according to the Treasury Department.

They pointed to other intermediate steps that could be imposed before any outright block is considered. Such measures could include restricting additional banking operations in dollars by Russian banks. A more modest move also could help the U.S. stay in step with its European allies, whose economies would bear the brunt of any Russian reaction.

Tightening Sanctions

Acting in concert last July, the U.S. and EU, started imposing restrictions on access to capital markets for several Russian banks. Those sanctions, which were tightened in September, prohibit long-term debt or equity financing by Russian banks, including the country’s biggest lenders, VTB Group, OAO Sberbank and OAO Gazprombank.

European leaders are discussing ways to put more pressure on Russia’s economy and its financial system. U.K. Prime Minister David Cameron said on Feb. 24 that the EU should consider sanctioning entire sectors of the Russian economy if the current truce in Ukraine fails. He also raised the possibility of barring Russian banks from the international financial messaging system used for most international money transfers. That system is run by the Society for Worldwide Interbank Financial Telecommunication, known as SWIFT.

‘A Big Decision’

“Looking at the SWIFT banking issues is a big decision, but there is a logic for it,” Cameron said. “If Russia is going to leave the rules-based system of the 21st century, it will have to start thinking about whether it is going to be in the 21st-century system when it comes to investment, banking, clearing houses and the other things that make our world work.”

The U.K. first urged EU leaders to consider blocking Russian access to SWIFT in August, but the idea wasn’t pursued. The U.S. also has considered the idea, though the Obama administration leans more toward fully sanctioning individual banks if a decision is made to escalate the pressure on Russia, one of the American officials said.

Some U.S. lawmakers have been pressuring the administration to intervene more forcefully. At a Bloomberg breakfast in Washington Thursday, U.S. Senate Foreign Relations Committee Chairman Bob Corker said he’d support additional sanctions against Russia if there were any violation of the February truce agreement. He lamented that the U.S. hasn’t done more to provide Ukraine with defensive weaponry to withstand Russia’s advances.

“A long time ago, we should’ve been giving them lethal weaponry that they can handle,” said Corker, a Tennessee Republican. “I think we have not shown much moral fiber as it relates to Ukraine.

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