With a New Sanctions Package, the U.S. Squeezes Russian Trade

(Photo by Egor Maltsev via Getty Images)

A graph of the ruble exchange rate against the background of the Russian flag and paper banknotes.

Expanded U.S. sanctions against Russia will increase the cost of dual-use goods for Moscow to continue its war in Ukraine, but they may also strain U.S. relations with states that help the Kremlin. On June 12, the U.S. Treasury unveiled a large new package of sanctions on Russia over the war in Ukraine, including over 300 new primary sanctions designations in jurisdictions around the world. Most impactfully, the United States may place secondary sanctions on financial institutions that interact with any of more than 4,500 Russian entities, up from around 1,200. Entities with which interaction runs the risk of secondary sanctions will now include Sberbank and VTB Bank, Russia's largest banks, and many of Russia's other large industrial and financial institutions.

The United States also broadened existing export controls and restrictions to affect U.S.-branded goods even if they are not made domestically. This measure primarily targets semiconductors, as Russia has continued sourcing chips for its military from third-party countries.
The new sanctions also targeted Russia's Moscow Exchange and the National Clearing Center, halting the operation of Russia's oldest and most important currency trading platform. Moscow Exchange rates were used to determine the official exchange rate of the U.S. dollar, euro, yuan and other currencies into rubles. In its absence, the Russian Central Bank quickly determined an alternative mechanism for establishing official exchange rates "using bank reports and information received from digital platforms for over-the-counter trading."
U.S. Treasury Secretary Janet Yellen said the new measures "strike at [Russia's] remaining avenues for international materials and equipment, including their reliance on critical supplies from third countries…increase the risk for financial institutions dealing with Russia's war economy and eliminating paths for evasion, and diminish Russia's ability to benefit from access to foreign technology, equipment, software, and IT services."

The move is intended to complicate Russia's ability to receive key civilian and military inputs in the near-to-mid term, though the effectiveness of the sanctions may fall with time. The United States is pressing forward with the expanded secondary sanctions threat for two reasons. The first is that U.S. President Joe Biden's December 2023 executive order that initially raised the secondary sanctions threat has already slowed Russia's trade with key partners, including China, Turkey and the United Arab Emirates. Russia's trade with these partners, most notably China and Turkey, stagnated and declined in the months following the executive order, obstructing Russia's ability to receive payments for its exports and continue acquiring key civilian and dual-use military goods needed to keep its civilian economy and war production intact. The United States intends to intensify this trend by expanding its secondary sanctions threat, as alternative payment mechanisms may take time to establish, meaning Russia's key trade will remain threatened. The second reason is that the United States and the West are struggling to find alternative measures to stop Russia from gaining ground in Ukraine. As NATO states lack the military production capacity and political will to ensure Ukraine's security through increased weapons deliveries and personnel deployments, increased sanctions are the only meaningful tools left to constrain Russia's ability to launch further offensives in Ukraine. However, Russia and its partners in Asia will eventually find alternative mechanisms to facilitate the trade of key goods. This means that the sanctions may become less effective over time, likely failing to impact Russia's military capabilities enough to enable Ukraine to reverse Russia's territorial seizures.

According to Chinese customs data, the value of China's exports to Russia fell by almost 16% in March from a year earlier, marking the first year-over-year decline since 2022. In April, year-over-year China-Russia trade in dollar terms fell again by 13%. According to data from Turkey's Trade Ministry, exports to Russia decreased by 33.7% year over year in the first quarter of 2024.

The sanctions will lead more companies to curtail ties with Russian entities but could eventually strain U.S. relations with countries exposed to U.S. action, such as China, Turkey and India. The vast majority of international financial institutions that have been dealing with newly sanctioned Russian entities will choose to stop interacting with those entities, self-enforcing the U.S. sanctions. Many global financial entities that have not already may even end all interaction with Russian counterparties as an act of overcompliance to eliminate the possibility of inadvertently violating the expanded sanctions. However, secretive financial entities will likely be set up to facilitate business with only Russia in jurisdictions around the world. Additionally, a small but significant subset of existing financial institutions will likely choose to continue cooperating with Russian entities, even though doing so will put them at eventual risk of U.S. secondary sanctions. Governments will be loath to stop this trade for geopolitical reasons; in particular, China will not want to be seen as effectively enforcing U.S. policies to constrain Russia. Institutions' continued cooperation with Russia will increase tensions between the United States and numerous BRICS+ nations in the Global South, particularly as these states increasingly pursue de-dollarization to reduce their exposure to U.S. sanctions.