Anna Zhelisko touches the casket of her grandson Dmitry Zhelisko as it arrives at the Church of St. Volodymyr on April 03, 2022 in Chervonohrad, Ukraine. (Joe Raedle/Getty Images)

Although the Biden administration has made economic pressure central to punishing Russia for invading Ukraine, why has it refrained from employing its most devastating economic weapons against Putin himself? In the Financial Times, Hudson Senior Fellow David Asher outlines an economic warfare strategy designed to strangle Putin financially and destabilize his regime.

See key takeaways below, and join us Monday for a conversation with Hudson Research Fellow James Barnett on his reporting from the frontline of the war in Ukraine.

Key Takeaways

1. It's Time to Target Putin's "Palace Economy"

The U.S. and its allies [need to use] all the levers of state to put the Russian president’s “palace economy” out of business. The primary focus of this campaign should be the corporate infrastructure surrounding Putin’s personal piggy bank, Bank Rossiya, which was first hit by Washington sanctions in 2014 over its links to Kremlin officials. The U.S. is already upping the financial ante against Bank Rossiya’s networks, its shareholders, and partners—yet the bank lives on, and through it, Putin’s ability to move money around the world.

The Russian president’s finances are like a Matryoshka doll: overseas funds are nested within Bank Rossiya’s complex system of beneficially-owned holding companies and myriad minority-owned corporate fronts in countries such as Cyprus and the Netherlands, which act as non-bank financial remitters. To push Bank Rossiya to the brink and impair Putin’s own finances, these corporate relationships must be attacked — not only with sanctions but also via clandestine financial, intelligence and cyber operations.

2. The Achilles Heel of US Sanctions Strategy

One of Bank Rossiya’s most infamous fronts, Cyprus-based Telcrest Investments Limited, is linked to individuals under sanction within Putin’s inner circle, including Rossiya chair Yuri Kovalchuk. Yet inexplicably, Telcrest has not been designated by the U.S. Treasury, nor has its Dutch sister company ABR Investment. This is despite ABR’s parent and 100 per cent owner ABROS having been under sanction since 2014 for its central position on the Rossiya network. The question is why not.

Treasury lawyers may reason that since Bank Rossiya technically owns only a minority stake in Telcrest, it is not eligible for sanctions. This exposes the Achilles heel of the U.S. sanctions strategy: the Office of Foreign Assets Control’s (Ofac) “50 per cent rule,” which holds that an entity that is controlled but not more than half-owned by one or more blocked persons is not itself automatically blocked. During my three decades leading financial pressure campaigns in the U.S. government, almost every bank and network under sanction that I dealt with shielded itself from the full impact of these curbs by employing interlocking minority ownership interests and beneficial ownership structures via proxies and partners to evade this threshold. Then, as now, we were fighting with one arm tied behind our backs.

3. Leveraging America's Most Powerful Illicit-Finance Tool

Another self-limiting factor has been Washington’s reluctance to deploy the most feared illicit finance network-busting tool: Section 311 of the USA Patriot Act. This allows the Treasury to designate a financial institution as a “primary moneylaundering concern,” and has repeatedly been used to sever banks from the U.S. financial system. Given the dollar’s global primacy, this effectively paralyses the U.S. targets of money-laundering activity.

Bank Rossiya should be designated under Section 311, as should Cypriot banks serving its network. Cyprus can either co-operate or face the financial isolation felt by Latvia after its leading bank, ABLV, was hit by Section 311 four years ago for laundering money for Russia, North Korea, and multiple international criminal organizations.

Quotes may be edited for clarity and length. 

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