Russia: the cracks are starting to show

Since the invasion of Ukraine by Russia on 24 February 2022, more than 30 countries have imposed sanctions on Russia. These sanctions impacted Russia’s financial system, halted energy imports and stopped shipments of key components including semiconductors and other electronics. However, the question remains of whether these sanctions have and continue to have a major impact on Russia.

According to Edward Fishman, who led the U.S. State Department's sanctions policy after Russia invaded Crimea in 2014, "The short answer is yes, the sanctions are effective.” This is the case because the goal of the sanctions is to cause severe consequences in Russia for its actions and to impede its ability to continue with the aggression.

The U.S. Congressional Research Service recently stated that the coordinated sanctions on Russia are significant due to the integration of Russia in the global economy and the size of the Russian economy as the 11th largest in 2021.  

A spiralling effect

Since the full effect of sanctions normally takes time to materialise, evidence is beginning to show that the Russian economy is starting to deteriorate at a faster pace. During November of 2022 the Russian Central Bank noted a faster economic contraction in the last quarter of the year, recorded at 7.1% compared to previous quarters which were around 4%.

The Council of The European Union stated that a 2022 independent analysis by the World Bank, the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) estimated that by the end of last year, Russia’s gross domestic product (GDP) would have dropped between 3.4% and 4.5%. This is on the back of a more than $630 billion war chest that was stockpiled by Russia and held in its Central Bank, subsequently sanctioned and frozen.

The recent expansion of oil-sector sanctions is expected to increase pressure on Russia even further with an EU ban on seaborne Russian crude oil imports from 5 December 2022 and a ban on Russian oil products from 5 February 2023. Reuters reported that a senior Russian source, who spoke on a condition of anonymity, indicated that the “oil products’ embargo will have a bigger impact on Russia than the restriction on crude oil.” Reuters also quoted Ron Smith from Moscow-based brokerage, BCS saying that "We think that the refined product embargo may be more significant than the crude embargo, given that exporting a given volume of products is much more logistically complex than an equivalent amount of crude. Our assumption has been that the two embargoes combined would reduce Russian oil output and total exports by perhaps 1 million barrels per day by the end of the first quarter of 2023."

Furthermore, a price cap of $60 per barrel was placed on Russian crude oil by the G7 Nations, Australia and the 27 EU countries on 5 December 20222 and according to a recent report from Reuters, a price cap of $100 per barrel was implemented on products that trade at a premium to crude, principally diesel, and a cap of $45 per barrel was set for products that trade at a discount, such as fuel oil and naphtha and this was implemented on 5 February 2023.

In a recent press conference, Janet Yellen, the U.S. Treasury Secretary stated that the price cap that was imposed on Russian oil in December seems to be achieving the set goal of making Russian oil available but at the same time reduce Russia’s revenue.

Increased scrutiny

Many multinational firms have severed ties with Russia due to increased pressure from sanctions, consumers, and investors. Sanctions were also slapped on Russian oligarchs in their individual capacity and as a result of their ties to some of these multinational firms. Going forward, it is highly likely that global regulators will increase their levels of scrutiny of sanctions evasion, increase the number of sanctions and the level of censure for firms failing to meet expectations. Firms can also expect a more coordinated and targeted approach between global regulators with regard to the evasion of sanctions which will have far-reaching implications for firms across the globe. This could be due to sanctioned entities and individuals becoming more sophisticated in their methods to evade sanctions.

Therefore, firms that are not performing customer sanction screening at least daily and against up-to-date sanctions lists, run a serious risk of breaking sanctions.  In addition, firms that are not screening payments/transactions against sanction lists in real-time, also run a significant risk of non-compliance.

Lysis Group has the expertise to assist

Lysis has the expertise to assist firms in this regard by providing a managed service platform for initial screening and on-going monitoring requirements or by providing managed teams to execute this work on their customers’ platforms. All staff have the required anti-money laundering (AML), Know Your Customer (KYC) and other financial crime requirement expertise. Using industry leading software, Lysis can also screen legal entities and individuals against all global watch lists and sanction lists, either in bulk or individually.

Analysts will review all potential hits and thoroughly document whether there are any true or false hits. Any positive hit will be escalated to the client in an agreed format and timeline, but all discounted and positive hits will go through a rigorous quality assurance review. To add to clients’ peace of mind, screening can be carried out as often as required, including daily, weekly, or monthly batch screening. All entities and individuals will be screened automatically as soon as an international watch list or sanction list is updated.

Furthermore, it is important to note that customer due diligence (CDD) does not stop once customer on-boarding has been completed. CDD measures should include ongoing monitoring to keep track of higher-risk customers, suspicious transactions, changing customer profiles, event driven triggers etc.

At the same time, firms must be clear about their risk appetite and keep it under review as the business environment develops or changes. The importance of this will depend on each firm’s business model and customer base, but as a discipline, regular reviews of risk appetite and exposure against that appetite are crucial.

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