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The US must direct its financial punishment against Putin itself

The author is a former State Department official and a Senior Fellow at the Hudson Institute

US Deputy Treasury Secretary Wally Adeyemo toured Europe last month to step up EU sanctions and step up asset freezes against Vladimir Putin and his nomenklatura. His message to Moscow’s trailblazers was clear: “To anyone who might be able to help Russia take advantage and circumvent our sanctions.” . . we will come and we will find you,” he warned. But even in the face of unprecedented economic pressures, much of Putin’s financial network remains operational.

Financial penalties, no matter how large, will not achieve our goals unless they target Putin himself. The US and its allies need a financial war strategy that goes beyond sanctions and uses all government leverage to put the Russian President’s “palace economy” out of business.

The primary focus of this campaign should be the corporate infrastructure surrounding Putin’s personal piggy bank, Bank Rossiya, which was first hit by Washington sanctions in 2014 for its ties to Kremlin officials. The US is already raising the financial stakes against Bank Rossiya’s networks, its shareholders and partners – but the bank lives on, and through it, Putin’s ability to move money around the world.

The Russian president’s finances are like a Matryoshka doll: foreign funds are embedded in Bank Rossiya’s complex system of beneficiary holding companies and myriad minority-owned corporate fronts in countries like Cyprus and the Netherlands, which act as non-bank financial intermediaries. In order to bankrupt Bank Rossiya and affect Putin’s own finances, these corporate relationships must be attacked – not only with sanctions, but also through covert financial, intelligence and cyber operations.

For example, one of Bank Rossiya’s most notorious fronts, Cyprus-based Telcrest Investments Limited, is linked to sanctioned figures within Putin’s inner circle, including Rossiya chairman Yuri Kovalchuk. Inexplicably, however, Telcrest was not named by the US Treasury Department, nor was its Dutch sister company ABR Investment. This is despite the fact that the parent company and 100% owner of ABR, ABROS, has been sanctioned since 2014 for its central position in the Rossiya network. The question is why not.

Financial lawyers could argue that since Bank Rossiya technically only owns a minority stake in Telcrest, it doesn’t qualify for sanctions. This exposes the Achilles’ heel of the US sanctions strategy: the Office of Foreign Assets Control’s (Ofac) “50 percent rule,” which states that a company controlled by one or more blocked individuals, but no more than half is held, this is not automatically locked itself. During my three decades of leading financial pressures in the US government, nearly every sanctioned bank and network I have dealt with has shielded itself from the full effects of these restrictions by employing interlocking minority ownership and beneficial ownership structures through proxy and affiliates to bypass this threshold. Then as now we fought with one arm tied behind the back.

If we want to sharpen our financial fighting skills, the 50 percent rule should be abolished immediately. In addition, Ofac should publicly identify its affiliates and subordinates so banks know who to target and European and Asian allies know which assets to freeze and confiscate.

Another self-limiting factor has been Washington’s reluctance to use the most feared tool to disrupt illicit financial networks: Section 311 of the USA Patriot Act. This allows the Treasury Department to designate a financial institution as a “primary money laundering entity” and has been used repeatedly to disconnect banks from the US financial system. Given the global dominance of the dollar, this effectively cripples US money laundering targets.

Bank Rossiya should be named under Section 311, as should Cypriot banks serving its network. Cyprus can either cooperate or face the financial isolation Latvia feels after its leading bank ABLV was hit by Section 311 four years ago for money laundering for Russia, North Korea and several international criminal organizations.

Finally, despite European opposition, the US must impose sanctions on Putin’s biggest moneymakers: Gazprom, Gazprombank and Rosneft. That Putin is profiting from rising oil and natural gas prices makes a mockery of our strategy of imposing crucial costs on his regime for its war in Ukraine.

US-Russia sanctions are important, but they only work as one element in a broader hybrid warfare strategy. This should have a single goal: to choke off Putin financially and lay the groundwork for internal opponents to depose him.

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https://www.ft.com/content/c9a3605e-b9b5-46f3-ad72-f68a929c2ba0 The US must direct its financial punishment against Putin itself

Adam Bradshaw

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