The US has begun imposing new sanctions for supporting Russia's military-industrial complex. What's important to know?

The new EU sanctions package lacks any major names. American sanctions are more severe. For the first time, the US has imposed sanctions on a new basis—for direct or indirect ties to the military-industrial complex, which poses a threat to foreign banks.

On Friday, February 23 , the United States and the European Union (and the United Kingdom the day before ) imposed new sanctions against Russia, marking the second anniversary of the start of the Russian military operation in Ukraine . US authorities also cited the death of Alexei Navalny in a Russian prison as justification for their sanctions : specifically, the US State Department imposed sanctions against three officials of the Russian Federal Penitentiary Service. Moscow considers the unilateral sanctions illegitimate. RBC examined the severity of the new Western sanctions.

What sanctions has the European Union imposed?

The EU's sanctions package (the 13th) turned out to be much less significant than previous rounds. The EU did not impose any major trade restrictions (the expansion of the export embargo proved cosmetic). Previously, European officials admitted to journalists that there were essentially no more categories of goods to restrict in the remaining trade with Russia. The European package "contains no sectoral measures, and although the number of Russian sanctioned entities in the EU has already exceeded two thousand, overall, the new names on the list are insignificant," says George Voloshin, a sanctions expert with the Association of Certified Anti-Money Laundering Specialists (ACAMS).

The sanctions list, which includes a freeze on European assets and a travel ban for individuals, now includes 194 individuals and organizations, primarily from the military-industrial complex (MIC). A key new addition to the package is sanctions against ten companies and individuals implicated, according to the EU, in the supply of North Korean weapons to Russia, as well as North Korean Defense Minister Kang Sun-nam. Additionally, ten foreign companies (from China , Kazakhstan, India, Serbia, Thailand, Sri Lanka, and Turkey) have been added to the list of organizations to which the EU prohibits the sale of dual-use technologies and goods for the development of the Russian defense and security sector.

"Sanctions will show their effects over time," the European Commission asserted. EU Special Envoy for Sanctions David O'Sullivan "continues to engage with key third countries to counter sanctions circumvention," and "tangible results are already visible," the Commission stated in Brussels on February 23.

In response to the 13th package of EU sanctions, the Russian Ministry of Foreign Affairs imposed restrictions on entry into Russia for a number of European officials, including representatives of EU countries and European organizations responsible for providing military aid to Ukraine, advocates for the confiscation of frozen Russian assets, as well as participants in the parliamentary assemblies of the OSCE and the Council of Europe, "who systematically make aggressive statements against Russia."

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Before announcing new sanctions, the United States promised they would be "crushing." On February 23, the US Treasury and State Departments announced blocking sanctions against more than 500 individuals and organizations—both Russian and from third countries. The US authorities did not impose any new sectoral measures.

Specifically, under the heading of "sanctions evasion," the US Treasury Department added six Chinese companies to the SDN sanctions list, which, according to its data, supplied microelectronics to Russia, including those of "foreign origin." Four Serbian companies, which the US accused of supplying electronics, equipment, and microchips to Russian customers, were also added to the list, as well as the Liechtenstein-based Rheingold Edelmetall and three Germans associated with it, all sharing the surname Diegelmann. According to the US Treasury, they disguised the Russian origin of the precious metals they handled and helped Russian clients buy and sell them.

The main innovation of the latest US sanctions is the first application of the US President's December executive order, which authorized the US Treasury Department to impose sanctions on foreign banks for facilitating transactions for sanctioned Russian entities in certain sectors of the economy or for facilitating the supply of certain materials and equipment to Russia's military-industrial complex. Sanctions against third-country banks have not yet been imposed. However, on February 23, the US added more than 300 predominantly Russian companies to the Specially Designated Nationals (SDN) sanctions list for a new reason: operating in a Russian industry that supports the country's "military-industrial base." Foreign banks will now face secondary sanctions for collaborating with such companies.

Even before today's sanctions, the US President's December 22 executive order had a negative impact on Russia's trade with China, Turkey, and India, Voloshin notes. This is because, according to this executive order, the technology, defense, construction, aerospace, and manufacturing sectors of the Russian economy are automatically classified as part of the military-industrial complex. "There have been numerous media articles recently about Chinese, Indian, Turkish, and other banks refusing to service accounts of companies that, even though they are not on the US sanctions lists, are considered part of the Russian military-industrial complex under the new US definition," Voloshin notes.

"President Biden recently signed an executive order with new authorities that allow us to send a simple message to companies and financial institutions around the world: If you provide material support to the Russian military, we will come after you with every tool at our disposal," said U.S. Treasury Deputy Secretary Wally Adeyemo on February 23. The U.S. Treasury's Office of the Treasury's Office of the United States (OFAC) noted on its website that "a variety of U.S. sanctions authorities provide the ability to sanction non-U.S. persons that provide goods, services, or other support to Russia's military-industrial complex," and this applies not only to the potential secondary sanctions against banks under the December executive order.

Which US companies are linked to the Russian military-industrial complex?

For work in the sector that is part of the "expanded" military-industrial complex according to the US, the SDN list includes, for example, JSC Electronic Moscow (created in the early 2000s in accordance with a decree of the Moscow government), Gazprom Space Systems, JSC Special Economic Zone of Industrial and Production Type Alabuga, the Keldysh Institute of Applied Mathematics of the Russian Academy of Sciences, NOVATEK-Murmansk (construction sector), Nevsky Zavod (manufacturing sector), Zvezda Shipbuilding Complex (manufacturing sector), RuskhimAlliance (construction sector), TransContainer (defense and related sector), Chelyabinsk Forge and Press Plant (manufacturing sector), PIK-Specialized Developer (construction sector), and Mechel (manufacturing sector).

Exporters are among the companies with which foreign banks will face secondary sanctions for "significant transactions." However, not all exporters included on the SDN list are classified as belonging to military-industrial complex-related sectors. For example, the coal mining company SUEK (although the Russian Ministry of Defense's sanctions justification calls it "one of SUEK's largest clients") is listed as part of the transportation sector, while TMK is listed as part of the metals sector. Neither of these sectors is currently designated by US authorities as part of the "military-industrial base."

"These sanctions, including those against Mechel, should be considered in conjunction with possible secondary sanctions against non-US financial institutions," says Voloshin. He believes that companies added to the sanctions list in accordance with the December US order "could face significant problems outside of Russia, outside of direct US jurisdiction."

Until April 8, 2024, the United States has allowed its citizens and companies to enter into transactions with TransContainer, Mechel, SUEK, TMK, the Zvezda shipbuilding complex, and a number of other entities aimed at winding down business with them.

"The US logic is clear: the main blow is aimed at companies directly involved in arms production or at companies whose products could be used for arms production, such as steel producers. Exporters, who provide foreign currency inflows, are also under attack. Therefore, sanctions against Mechel, SUEK, and TMK were a matter of time," notes Maxim Osadchiy, head of the analytical department at BKF Bank. Every major company in the sector was preparing for sanctions in one way or another; they had a "Plan B," says Sergey Suverov, investment strategist at Aricapital Management Company. He points out that metallurgical companies had already reoriented their supplies primarily to the domestic Russian market or to the markets of friendly countries.

This doesn't mean the sanctions won't impact steelmakers' financial performance. "Naturally, this will lead to a reduction in production volumes, but Severstal, for example, managed to quickly reconfigure its production processes after the sanctions were imposed, and is now operating at almost 100% capacity," says Suverov. "Of course, the sanctions will impact companies' financial performance. You can see what's already happening with payments to China , Turkey, and the Emirates—the financial bottlenecks that are forming. And China is an important export destination for Mechel, TMK, and SUEK," adds Osadchiy.

The most important consequence of the sanctions is the potential concern among buyers from friendly countries, including in the context of possible secondary sanctions, Suverov believes. The stock market's reaction to the sanctions against Mechel and TMK (SUEK is a private company) is unlikely to be strong, according to RBC sources. "I think the decline will be around a few percent. But no more," he says.

How heavily do companies depend on exports? Mechel generates an average of 31% of its revenue from exports (ACRA estimate, fall 2023). TMK generates 8-12% of its revenue from foreign orders, depending on the product segment (Alfa-Bank analyst estimate, fall 2023). SUEK's revenues are over 65% derived from abroad (Expert RA data, summer 2023). How sanctions against energy projects have been expanded

The imposed US sanctions "are a consistent continuation of the existing sanctions policy, which is primarily aimed at reducing state revenues from Russian exporters' export earnings and complicating payment chains," says Vadim Panin, partner at Better Chance, pointing, among other things, to sectors where Russia competes with the US in global markets (for example, LNG). In this context, the announced sanctions against nine small Russian banks and LNG projects "will not lead to the cessation of the export operations they target, but will inevitably reduce revenue from product sales" and "will complicate the implementation of projects currently under construction," Panin believes.

The State Department's announcement specifically highlights sanctions intended to "restrict future energy production and exports" by Russia. Specifically, the State Department notes that sanctions were imposed on February 23 against two organizations involved in the financing and construction of LNG tankers and production lines for the Arctic LNG 2 project: NOVATEK-Murmansk LLC and the Zvezda shipbuilding complex (the project itself was added to the US sanctions list in November 2023).

The US also imposed sanctions against Globaltek LLC, established in 2019 to implement the Yakutsk gas project, as well as the state-owned holding company Rosgeologia and more than a dozen organizations affiliated with it (including Zarubezhgeologia, the operator of Rosgeologia's foreign projects).

In addition to sanctions against Russian banks and the National Payment Card System (more details on their consequences can be found here), the US has imposed blocking sanctions against a number of Russian investment companies and venture funds (including BSF Capital, Elbrus Capital Investment Consultant, Orbita Capital Partners) and fintech companies (Financial Information Systems, Quorum, Crypto Pro, etc.).

Separately, the US added Sovcomflot, Russia's largest shipping company, to its list of blocking sanctions. The US had already imposed sanctions against it in February 2022, but those only concerned restrictions on debt and equity financing. Sovcomflot has also already been added by the European Union to its list of Russian state-owned companies with which Europeans are prohibited from conducting any transactions.