(Bloomberg) — JPMorgan Chase & Co. CEO Jamie Dimon was in the hot seat.
Deep into a seven-hour congressional hearing on Sept. 21, Representative Brad Sherman, a Democrat from California, pressed Dimon on whether his bank would sever ties with Russian companies including energy giant Gazprom PJSC.
Banks like Dimon’s, Sherman argued, were exploiting a sanctions loophole to keep doing business in Russia despite its invasion of Ukraine.
“We are following the instructions of the American government as they asked us to do it,” Dimon responded before Sherman cut him off, setting his sights on Citigroup Inc.’s Jane Fraser with a similar inquiry.
The exchange put on display how the country’s largest banks are caught in the push-pull between the Biden administration and Congress on sanctions. Behind the scenes, the Treasury and State Departments have urged banking giants including JPMorgan and Citigroup to keep doing business with certain strategic Russian firms, according to people familiar with the situation.
The quiet effort is part of the administration’s push to minimize adverse impacts of the sanctions regime designed to punish Russia. While some in Congress pound the table for stronger measures against Russia, the administration is trying to hinder Russia’s advances while avoiding a global economic catastrophe.
“Congress needs to understand this — the US government has not imposed a comprehensive embargo with Russia, there’s still pockets of business that are allowed,” Nnedinma Ifudu Nweke, an attorney who specializes in US economic sanctions and trade embargoes at Akin Gump Strauss Hauer & Feld LLP, said in an interview.
The Treasury Department “will continue to have meetings to educate banks on those pockets of allowable transactions, especially in the humanitarian space,” Nweke said.
The Biden administration has repeatedly said it wants banks and businesses to keep the money flowing to non-sanctioned sectors of Russia’s economy. But the extent of its conversations with the banks hasn’t been previously reported.
Treasury and State Department officials have called on lenders to continue offering basic services such as US dollar settlement, payment transfers and trade finance offerings for those Russian companies exempt from certain aspects of sanctions such as Gazprom or fertilizer producers Uralkali PJSC or PhosAgro PJSC, the people said.
The back and forth highlights the balance both banks and the government must maintain in denying President Vladimir Putin the money he needs to fund the invasion while stemming broader economic shocks.
Banks are expected to enforce restrictions by denying services to sanctioned banks, people and entities, and can be punished with multibillion-dollar fines for failing to comply.
At the same time, they’re also central to keeping money flowing around the globe, even as they’re largely retreating from Russia.
At Citigroup, executives have spent months scaling back operations in Russia, offloading derivatives and trimming its overall exposure to the country to $7.9 billion by Sept. 30, from $9.8 billion at the start of the year.
Long before the invasion, Citigroup had announced it intended to exit consumer banking in Russia. In August the company said it would wind down those operations along with its commercial-banking division. Fraser followed that up with an announcement last month that Citigroup would also wind down its institutional operations in Russia.
“We have been supporting our multinational clients in Russia,” Fraser said last month. “We are now informing them that we will be ending nearly all of the institutional-banking services we offer by the end of the first quarter of next year. At that point, our only operations in Russia will be those necessary to fulfill our remaining legal and regulatory obligations.”
JPMorgan, similarly, began pulling back from most of its Russia operations after the invasion, though the company said “limited activities” would continue.
Representatives for Citigroup and JPMorgan declined to comment, while a spokesperson for Sherman’s office didn’t have comment when reached by phone. A Treasury Department spokesperson said the department has issued guidance to the banking industry to make sure that activities for humanitarian aid, energy and agriculture are authorized.
It’s not just the US sanctions regime making life hard for the thousands of compliance staffers banks now employ. One senior bank executive described how the US government might encourage lenders to do business with a certain company but they’re hamstrung by the fact that that company has been sanctioned by the European Union instead.
For the most part, the Treasury Department’s efforts have been overseen by Deputy Treasury Secretary Wally Adeyemo and Liz Rosenberg, the assistant secretary for terrorist financing and financial crimes. The agency has also crafted Frequently Asked Questions pages to remind banks that some energy, grain, communications and other lines of business are exempt. They’ve also issued general licenses to make it even clearer to banks that those activities can continue.
Still, banks have been cautious, subjecting most business touching even non-sanctioned Russian clients to a complex and lengthy review process. That’s driven the administration to encourage lenders to continue banking certain Russian companies as part of their efforts to avoid mass starvation across the planet.
“Food security for the world critically relies on these authorized transactions to continue,” said Ambassador Jim O’Brien, head of the State Department’s Office of Sanctions Coordination. “We continue to clarify and also to reassure banks and others involved in agricultural trade that they are not part of the sanctions regime.”
In one instance, the Office of Foreign Assets Control explicitly told banks it had not blocked PhosAgro, Europe’s biggest manufacturer of phosphate fertilizers. Instead, the agency urged: “As a general matter, agricultural and medical trade are not the target of sanctions imposed by the United States on Russia in response to its unprovoked and brutal war against Ukraine.”
The US and it’s allies’ use of the financial system as the sanctions method of choice has thrust global banks onto the front lines of enforcing the myriad measures against Russia. The firms have had regular discussions with the Biden administration since before the invasion in February.
JPMorgan “played its part in the implementation of the Western world’s policies and sanctions regarding Russia,” Dimon wrote in his annual shareholder letter in April. “Of course, we are following both the letter of the law and the spirit of all the American and allied sanctions, working hand in hand with governments to implement complex policies and directives, and then some. Managing this has been an enormous undertaking.”
The maneuvering hits at a new dynamic in sanctioning what was the world’s 11th-largest economy: Russia’s connectivity in multiple global markets, including being a major player in commodities and agriculture. That differs from previous sanctions regimes such as those against North Korea, which wasn’t integrated into the global financial system, or Iran, where the measures were more narrow.
Take Russia and Ukraine’s role in the global food supply. Together, they export more than a quarter of the world’s wheat, 70% of the planet’s sunflower oil and 14% of the globe’s corn, according to the Observatory of Economic Complexity. Since the invasion, food prices have climbed, with the Kremlin blaming Western sanctions.
“The goal is never for the population to suffer,” Nweke said. “The goal is never for the ordinary Russian to suffer. And so, the US policies I think will continue to have to find ways to continue to encourage humanitarian transactions and we need the banks to do that.”
—With assistance from Daniel Flatley.