US takes aim at financial institutions with new Russia sanctions authority

By Daphne Psaledakis and Andrea Shalal

WASHINGTON (Reuters) - U.S. President Joe Biden on Friday will sign an executive order allowing Washington to impose sanctions on financial institutions that help Russia evade sanctions, U.S. Treasury Secretary Janet Yellen said.

The executive order, part of a wider U.S. crackdown on sanctions evasion, also gives Washington the ability to ban products originating in Russia but processed in third countries, such as seafood and diamonds, Yellen said in a statement.

"Today we are taking steps to level new and powerful tools against Russia’s war machine," Yellen said. "And we will not hesitate to use the new tools provided by this authority to take decisive and surgical action against financial institutions that facilitate the supply of Russia’s war machine.”

Senior administration officials said the new executive order would make clear to financial institutions that they must either stop allowing their companies to ship components and goods to the Russian defense sector, or face significant sanctions.

The United States and its allies, including the European Union and Britain, imposed sanctions on Russia after the February 2022 invasion of Ukraine and have continued to ratchet up pressure on Moscow, targeting Russian President Vladimir Putin, the financial sector and dozens of oligarchs.

The order is being issued in coordination with allies.

The United States has repeatedly warned companies against evading U.S. sanctions imposed on Russia, and has targeted firms in the United Arab Emirates, Turkey and elsewhere that it has accused of helping Moscow skirt the measures.

Senior U.S. officials have also traveled to Turkey, the United Arab Emirates and other countries to warn that businesses could lose access to G7 markets if they do business with entities subject to U.S. curbs.

CHOKE POINT

One of the senior officials said Washington's initial sanctions and export controls have had a meaningful impact, with Russia's economy now 5% smaller than predicted before the war and grappling with a benchmark interest rate of 16%.

The new order would give Treasury and its allies new tools to target the networks Moscow was trying to put in place to circumvent these sanctions through the use of front companies and "witting and unwitting financial intermediaries," the official said, speaking on condition of anonymity.

"We've sanctioned a number of these companies that we've found, but ultimately the choke point for these companies and Russia's ability to continue to try and circumvent our sanctions is the financial system," one of the senior officials said.

"What this tool allows us to do is to target those institutions and give them a very stark choice."

The provisions will take effect immediately after Biden signs the executive order on Friday.

The officials said they were not aware of any U.S. or European institutions that were in violation of the order, noting that most U.S. and European firms had already scaled back their business with Russia dramatically.

The executive order will also give Washington the ability to ban products that originated in Russia but were "substantially transformed" outside of the country, including diamonds, a second senior administration official said.

The action comes after the Group of Seven countries earlier this month announced a direct ban on Russian diamonds starting Jan. 1 followed by phased-in restrictions on indirect imports of Russian gems from around March 1.

The United States has already banned the direct import of non-industrial Russian diamonds, but this measure would extend the ban to cover Russian-origin diamonds processed elsewhere, the official said.

(Reporting by Daphne Psaledakis and Andrea Shalal; Editing by Don Durfee and Michael Perry)