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The US has warned of “significant” sanctions risks for foreign banks that deal with the overseas subsidiaries of Russian lenders, as Washington works to deter Asian and Middle Eastern states from facilitating trade with Moscow.

The US Treasury Department’s Office of Foreign Assets Control (OFAC) issued an alert last week to foreign regulators and financial institutions advising them against dealings with new overseas branches or subsidiaries of Russian banks.

In the note, it advised “caution” and says the establishment of a new legal entity or office by a Russian bank should be a “red flag”, even in instances where the Russian lender is “not themselves sanctioned”.

“Efforts to open new branches or subsidiaries of [Russian] financial institutions should be viewed as a red flag for attempted Russian sanctions evasion,” OFAC says.

“Thus, any foreign financial institutions that deal with such branches or subsidiaries – including activities such as maintaining accounts, transferring funds, or providing other financial services such as payment processing, trade finance, and insurance – should be aware of the significant sanctions risks associated with facilitating Russia’s efforts to evade sanctions and abuse of the global financial system to fund its unjust war.”

The OFAC alert comes amid growing US efforts to stifle Russian payments for products vital to its war in Ukraine, such as electronics and dual-use goods, and its ability to receive funds for energy shipments.

In December 2023, US President Joe Biden signed an executive order that threatened foreign banks with sanctions if they facilitated transactions involving about 1,200 entities in Russia’s military industrial base. In June, this list was significantly expanded to more than 4,500 entities, including Moscow’s two largest lenders, Sberbank and VTB.

Major international financial institutions  have reportedly stopped facilitating trade payments for Russian firms due to fears they could lose access to the US dollar system.

But there are lingering concerns that smaller-sized banks, notably in China, are continuing to enable trade with Moscow.

“This alert and the additional secondary sanctions authorities are meant to prevent the small number of banks from supporting Russia… to cut them off even further, to ensure Russia is unable to buy sensitive goods,” says Laura Deegan, counsel at law firm Miller & Chevalier.

She tells GTR the alert is targeted at “smaller and mid-sized financial institutions in China or places like Turkey, the UAE, or even India, where there is a mentality of not trying to comply with extraterritorial US sanctions”.

Jason Prince, a partner at law firm Akin Gump, says an express reference to foreign regulators in the alert is “unusual” and that OFAC is likely hoping those authorities will pressure local banks to cut ties with Russian banks involved in sanctions evasion.

He tells GTR it is also worth noting the reference to “non-sanctioned” Russian financial institutions, which may indicate the US has intelligence of a possible Russian sanctions evasion scheme.

“To me, that was a clear message that the US has identified these entities as high risk for sanctions evasion – that OFAC has intelligence Russia is using them as the vehicles to try and set up these new branches and subsidiaries to continue engaging in business that will feed funds and resources into the Russian war machine,” he says.

Nevertheless, he notes there are “very few” Russian financial institutions not blacklisted by OFAC.

OFAC has previously sanctioned the foreign subsidiaries of Russian banks. In June, it blacklisted VTB Bank Shanghai, the only representative office of a Russian bank in China.

Legal experts now predict OFAC may soon target banks headquartered in countries such as China, the UAE or Turkey.

“This is a warning… before a potential designation of some of those foreign financial institutions,” Deegan tells GTR.

Prince echoes such views, noting: “When OFAC issues those types of alerts, it is trying to make very clear in a public way that it intends to take action.”

However, he suggests, the US will likely try to force change through diplomatic means first. “Because of the relationship that the United States has with these fence-sitter countries, there will likely be a lot of diplomacy and dialogue before there would be significant action taken,” he says.

In the alert, OFAC highlights its ability to sanction foreign financial institutions that deal with sanctioned Russian entities, as well as non-sanctioned firms operating in certain high-risk sectors.

Any individual or entity involved in the technology, defence and related material, construction, aerospace and manufacturing sectors of the Russian economy are covered by the US secondary sanctions regime.

In recent months, Moscow has sought to devise alternative means of cross-border payments, such as cryptocurrency and barter trading, to ease cross-border payment difficulties.