The US Department of Treasury’s Office of Foreign Assets Control (OFAC) has imposed new large-scale sanctions against the Russian financial sector, designating more than 50 banks, including systemically important energy bank Gazprombank.

This is one of the harshest US sanctions measures so far, coming amid a significant escalation of Russia’s full-scale military invasion of Ukraine.

Within less than one week prior to the sanction announcement, Ukraine was allowed to use Western-supplied missiles to strike into Russian territory, and Russia retaliated with a ban on exports of enriched uranium, updated its nuclear doctrine and deployed an intercontinental ballistic missile.

It is still likely that the outgoing presidential administration of Joe Biden could enact other tough sanctions before the president-elect Donald Trump takes office.

“The tightening of sanctions fits into the latest round of escalating geopolitical tensions and certainly looks like an attempt by the outgoing administration to use the available tools in the remaining period,” Renaissance Capital analysts commented, adding that “in this context, if after the change of administration in the US in two months geopolitical tensions stop escalating, this in itself will be a positive event for the Russian market.”

In the latest November 21 designations by the OFAC the most notable is the addition to the SDN (Specially Designated Nationals) list of Gazprombank and its foreign subsidiaries. The state-controlled bank of Russian energy giant Gazprom had remained unsanctioned so far, as it processes all payments for Russian gas exports.

"Today’s sanctions targeting Russia’s largest remaining non-designated bank, as well as dozens of other financial institutions and officials in Russia, will further diminish and degrade Russia’s war machine. This sweeping action will make it harder for the Kremlin to evade US sanctions and fund and equip its military," the Secretary of the US Treasury Janet L. Yellen is cited as saying in the press release.

In March 2022 Russia’s president Vladimir Putin signed a special decree enacting a “gas for rubles” settlement scheme under which gas buyers from “unfriendly” sanctioning countries would have to open two special accounts at Gazprombank: a ruble account and a foreign currency account.

Gas payments were made by transferring funds to the foreign currency account. The bank would then sell this currency on the Moscow Exchange and credit the rubles received to the ruble account. While initially the scheme was derided by foreign companies and regulators, they eventually complied. 

In June 2024, following the US sanctions against the Moscow Exchange and the halt of organised trading in US dollars and euros, the Central Bank of Russia adjusted the procedure for gas payments via Gazprombank, making it the only point for currency conversion for the payments.

In addition to Russia's Gazprombank, its subsidiaries in Switzerland, South Africa, Hong Kong, Luxembourg and Cyprus have been hit by US sanctions.

The analysts surveyed by RBC business portal compare the latest US sanctions to the measures against Russia’s two largest state-controlled lenders, Sberbank and VTB, in 2022.

As the OFAC has not yet included Gazprombank in its special licence allowing the financing of the energy deals, European clients will now not be able to pay for Russian gas, the analysts believe.

According to the General Licence 113, all transactions with Gazprombank and other sanctioned banks must be completed by December 20. 

RenCap analysts note that OFAC has still authorised payment for oil supplies from the Sakhalin-2 project to Japan through Gazprombank, as well as any transactions involving Gazprombank and its subsidiaries in relation to this project and Sakhalin Energy until 28 June 2025.

Current legislation (the abovementioned Russian Presidential Decree N 172 of 31 March 2022) does not allow other ways of payment for gas from unfriendly countries than through an authorised bank, so a change in the legal framework may be required, RenCap analysts believe.

Gazprombank is also one of the few banks offering UnionPay cards to Russian clients, which can be used to pay abroad. UnionPay cards of other players, which were already under sanctions, have stopped working abroad (T-Bank, MTS Bank, Primorye Bank and St Petersburg Bank). In addition to Gazprombank, another Russian UnionPay issuer, Primsotsbank, was added to the SDN-list on November 21.

The Russian state housing and mortgage agency Dom.RF is also sanctioned, along with BBR Bank, the National Reserve Bank, Trust (Trast) Bank (“bad asset” bank) and eight other banks out of the top 100 Russia’s largest lenders.

The analysts surveyed by RBC warned that such small and medium sized banks served as the main bridge for settlements and transfers to foreign banks. From these banks it was possible to make transfers in rubles to “friendly jurisdictions”, convert rubles into Fx outside Russia and then carry out settlements in Fx with foreign counterparties. 

The analysts generally see the targeting of the smaller banks as a continuation of the so-called “strangulation sanctions”, covered in detail by bne IntelliNews, and intended to cut off Russian companies from cross-border transactions.

Indeed, the US Treasury Department has also warned of the risk of secondary sanctions for foreign financial institutions that have joined or plan to join the System for Transfer of Financial Messages (SPFS), the Russian analogue of SWIFT.

"OFAC views joining SPFS after publication of this alert as a red flag and is prepared to more aggressively target foreign financial institutions that take such action. OFAC also urges stakeholders to review their exposure to institutions that have joined SPFS, as such banks may be conduits for Russian sanctions evasion," according to the sanction press release.

In addition, more than 40 securities registries and depositories authorised by the Central Bank of Russia (CBR) have been sanctioned, making almost half of the players that have CBR’s permission from the regulator to keep registers of owners securities. They will not be able to register or hold shares owned by non-residents or managed by foreign brokers.

"OFAC is aware that Russia has attempted to evade or avoid OFAC sanctions on the National Settlement Depository by requiring, via Presidential Decree 840, the transfer of certain securities to local Russian securities registrars. Today, OFAC is designating more than 40 such registrars," stated the press release.

Notably, on Saturday November 23 the Central Bank of Russia (CBR) has set the official ruble exchange rate at RUB102.6 to US Dollar, above the RUB100 to dollar threshold. The latest escalation has driven the ruble to the 13-month low.

As followed closely by bne IntelliNews, the ruble exchange rate is one of the most closely watched economic indicators by ordinary Russians, and RUB100 to US dollar is a “psychological” threshold the risk of breaching which would usually provoke a strong policy response.

But most recent reports claimed that Russian authorities are ready to let the ruble weaken beyond RUB100 per US dollar, in order to help the state budget and the military-driven fiscal stimulus.

“The impact of the latest sanctions on the ruble looks ambiguous: on the one hand, it may negatively affect the inflow of revenues from gas exports, on the other hand - gas transit to Europe via Ukraine (which accounts for half of the remaining supplies to Europe) would most likely have been completed by the end of the year anyway, alternative channels for gas payments from other countries may have already been prepared, and sanctions on a number of small banks may (once again) complicate payments for imports and transfers abroad.” RenCap analysts commented.