Banks Jittery Over Ties With Russia Following Sanctions Similar To Iran

Fear of uncertainty and possible legal entanglements have made global banks jittery about dealing with Russia, similar to Iran's experience with sanctions.

Faced with an unprecedented level of sanctions on Russia, banks are taking a dim view of business with all Russian entities and dropping clients if there is even a slight doubt on their ties to that country, Reuters quoted bankers and lawyers as saying.

While European and North American governments have introduced serious banking and other business sanctions, countries in Asia and Elsewhere are introducing their own restrictions.

Sanctions experienced by Iran went a bit farther than those announced against Russia, such as cutting off all banks, instead of a select group, and the central bank from the global SWIFT. But the overall psychological and legal impact appear not be too different.

While global banks have extensive experience with sanctions and have invested billions of dollars in compliance programs in recent years, the curbs on Russia are unmatched in their scale, speed and complexity and may yet grow, said executives. Russia was a much larger financial player before the sanctions than Iran ever was.

To avoid falling foul of the rules and having assets and capital ensnared by new curbs, banks are adopting extreme caution in all of their dealings with Russian entities, actions that will likely exacerbate global trade disruptions, said bankers and lawyers.

The United States alone fined banks billions of dollars for breaching its OFAC (Office of Foreign Asset Control) restrictions since 2010. BNP alone was fined $8.9 billion in 2014, while Commerzbank and HSBC were also fined in billion-dollar figures. From 2010-2019, the US took action against 32 banks and all paid penalties.

Many of these cases were related to Iranian sanctions violations, which has made international banks extremely careful in their dealings.

A senior Hong Kong-based Asia trade finance banker with a global lender told Reuters that his compliance colleagues are asking more questions even if a financing deal involves a non-sanctioned Russian entity, directly or indirectly.

The issue is not just current sanctions, but what may still come. "It's not just managing risk from the existing sanctions, but also thinking about what more could possibly happen on that front," an Asian banker told Reuters. "No one would like to sign a billion-dollar trade finance deal only to be told a week later that the entity in Russia has also been added to the sanction list."

There is also the danger of aftereffects even when sanctions are removed. Iran experienced this syndrome when it resolved its nuclear issue with world powers in 2015 and international sanctions were lifted.

From 2016-2018 when most economic sanctions were removed, Iran had a hard time to get major deals and joint ventures. While the country needed tens of billions of dollars in investment, it was able to secure just a few billion dollars.

The fear that a regime is unpredictable and sanctions can be reimposed for new unacceptable actions, will keep the financial sector and corporations away from a country which has emerged from sanctions.

Charlie Steele, partner at Washington-based consultancy Forensic Risk Alliance and a former US Treasury Department sanctions attorney told Reuters, "Banks generally, and certainly the global banks, often tend to be very cautious and conservative with respect to sanctions, especially U.S. sanctions.”

With reporting by Reuters