How The Sanctions Are Impacting Russia
Consumers are feeling the pinch in Russia as food prices rise and inflation is currently double the rate of the West. Inflation hit 17.3% at one stage, compared to the 8.7% inflation rate in developing countries. Many Russian companies shut down due to a lack of parts, including the Lada auto plant (majority-owned by Renault). Moscow’s mayor has said that the city is facing 200,000 job losses as large foreign companies, including McDonald's, Heineken, Coca-Cola, and the big four accounting firms (Deloitte, KPMG, EY, and PwC), withdrew. More than 1000 foreign companies have ceased operations in Russia, while international supply chains were crippled as container and transportation companies including Maersk, UPS, and DHL exited Russia.
The country is also facing a historic default on its bonds, freezing the country out of the debt market for decades.
The Seizure of Super Yachts and Assets
Hundreds of people including high-ranking officers, tycoons, and politicians have been placed on sanctions lists. Western seizures of superyachts owned by Russian oligarchs have drawn tremendous attention, including Igor Sechin’s $120 million “Amore Vero” (seized by France), and the $71-million “Lady M” owned by Alexey Mordaschov (seized by Italy). While this is a concerted effort to curb President Putin’s inner circle and apply pressure, identifying and blocking assets isn’t easy. Assets including luxury apartments and private jets have been seized from individuals including Nikolay Tokarev, the president of oil and gas giant Transneft and Rostec defence firm chief Sergei Chemezov. As many wealthy individuals use complex and opaque ownership structures to obfuscate true ownership of an asset, many governments have urged financial institutions to establish the unique beneficial ownership of every new and existing client so that no sanctioned person can hide behind financial constructs.
The Establishment of a Task Force
US Attorney General Merrick Garland has announced the creation of a task force that will pursue further seizure of oligarch’s assets, called “KleptoCapture”, which will include several tax specialists and federal investigators. Similar operations were instituted in France. Identifying and freezing assets is difficult, and seizing them even more so. France was only able to seize the Amore Vero because the crew had made an attempt to leave for Turkey, placing them outside of French law.
The Introduction of New Legislation
The US House of Representatives recently passed a new bill that would allow the president to confiscate and liquidate property owned by sanctioned individuals to be applied to specific purposes. The Asset Seizure for Ukraine Reconstruction Act may see seized Russian super-yachts and properties sold for the benefit of Ukraine. The package compiled by the Biden Administration sent to Congress will also create a new criminal offence: making it unlawful for anyone to own proceeds directly obtained from corrupt dealings with the Russian government. Any property used to facilitate violations would be eligible for seizure in order to make sanctions evasion even more difficult to achieve.
The Looming Recession
The IIF has predicted that Russia’s GDP will shrink 15% in 2022, while Goldman Sachs believes it will contract by 10%. Either way, Russia has not seen a recession of this magnitude since the 1990s. The nation’s manufacturing output in March dropped at its fastest rate since the COVID-19 pandemic, and the S&P Global Russian Manufacturing Index fell to 44.1%, indicating a severe contraction. Western and European nations alike have either implemented or are planning to implement bans on Russian coal and oil imports, which make up 40% of their budget. A total ban on Russian fuel would cost the country $250 billion in losses. The US and UK have already implemented bans, and the EU will likely implement a coal ban by August 2022.
How AML Teams Should Respond
Sanctions are only as effective as the ability of financial institutions to incorporate sanctions in their control environments. AML compliance teams are under severe pressure to comply, and as such, should adhere to the following recommendations:
- Effective Monitoring of Irregularities in Cryptocurrency and Fiat Transactions
Sanctioned institutions and individuals will find it difficult to move money through traditional financial channels, which means that sanctioned parties will look for alternative means to fund their operations. Cryptocurrency has been used to evade sanctions in the past (in North Korea and Iran) and a lack of knowledge as well as evasive technology may make it easier for individuals to disguise illicitly funded transactions. Teams should utilise tools that will enable them to monitor both fiat and non-fiat transactions and evaluate risks according to client behaviour.
- Adjust Controls and Monitoring
Sanctions lists are rapidly growing longer and longer every day. Teams need to layer regulatory changes into their control systems and adjust to regulatory shifts and newly defined typologies. Companies need flexibility and responsiveness from their software solutions to respond to these changes as they occur.
- Automate watchlist updates
Companies that use third-party software to run their watchlists must understand the frequency and manner in which data is updated. New sanctions are issued on a nearly daily basis by different countries and organizations, which means that sanction screening lists have to be updated far more frequently and customers screened with greater diligence.
It may take months for Russia to fully feel the effects of the economic sanctions, although ordinary Russians are already suffering due to rising costs and food scarcity. Russia’s dependence on foreign imports may make it harder to finance the war in Ukraine, especially with a weaker ruble and strict export controls in effect. It took an entire year after Russia was sanctioned for seizing Crimea in 2014 to show any signs of distress. These sanctions are only effective if they are enforced, however, which is why every business has an obligation to ensure its sanctions screening processes and software are equipped to handle these unprecedented changes.