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7 May 2024

How to Leverage the Financial System for Strengthening Export Controls on Russia?

Prepared by: Benjamin Hilgenstock, Elina Ribakova, Anna Vlasyuk, Guntram B. Wolff
Editors and co-authors:

KSE Institute experts Benjamin Hilgenstock, Elina Ribakova and Anna Vlasyuk, together with Bruegel’s Guntram B. Wolff, published the Working Paper Using the financial system to enforce export controls on Russia. The study shows how financial and non-financial institutions can contribute to improving control over Russia’s imports of battlefield goods.

Export controls enforcement faces serious challenges. Russia imported $12.5 billion worth of goods in 2023, which the EU, US, and their partners consider to be critical for the Russian war effort (so-called battlefield goods). Despite Western companies ceasing direct trade with Russia, their products still reach Russian markets through intermediaries in places such as mainland China (56,3%), Hong Kong (19,3%), Turkey, and the UAE.

The private sector lacks effective control over their supply and distribution chains, and Western policymakers have not sufficiently prioritized enforcing export controls on Western technology. In 2023, companies from sanctioning countries still accounted for 40% of Russia’s battlefield goods imports, which were largely manufactured in (61%) and shipped from (93%) third countries. This has direct consequences for Ukraine: 95% of the nearly 2,800 foreign components that have been found in Russian weapons on the battlefield, stem from coalition-based producers.

The authors propose to improve export control enforcement by leveraging the role of the financial system in international trade.

First, financial institutions themselves could play a crucial role in monitoring and impeding illicit transactions with sanctioned goods. Export controls enforcement is similar to anti-money laundering and countering terrorism financing efforts as it faces challenges like complex chains of custody, opaque ownership structures, and reliance on less-regulated jurisdictions. Thus, existing regulatory frameworks and established internal compliance systems in banks can be adapted to detect such schemes. With their access to extensive financial data, banks are well-positioned to trace transactions involving export-controlled goods.

Second, non-financial companies should learn from banks and adopt enhanced due-diligence procedures to comply with export controls. Building on banks’ experience with ‘know your client’ and ‘know your client’s client’ standards, companies can better detect and prevent suspicious transactions involving sanctioned goods within complex supply chains.

Incentives play a crucial role here. Banks developed compliance systems because the risk of discovery and potential fines clearly outweighed the costs. For non-financial companies, the situation is very different. Authorities should demonstrate their ability and willingness to investigate violations and impose significant fines. 

Better export controls enforcement does not come without costs. But Western policymakers must weigh those against the risks of Russia’s military gains. As insufficiently implemented sanctions allow Russia to produce more weapons and prolong the war, the expenses for Ukraine’s allies increase as well. More fundamentally, Western credibility is also on the line.


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