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There are signs that western measures and a domestic crackdown on Kyrgyzstan’s traditional banking sector are starting to bite, hindering Russian efforts to evade sanctions. Yet, booming transactions of a Kyrgyzstan-registered, ruble-linked cryptocurrency on a Kyrgyz exchange this spring indicate that sanctions-busters are still very active in the Central Asian nation.
Russian entrepreneurs have complained in recent months that their transactions have grown more expensive or slowed after the United States and United Kingdom sanctioned a Kyrgyz bank this winter. But they appear to have found a workaround.
“Even if Kyrgyzstan is sealing its border from microelectronics, if it’s not sealing its financial border from trade – crypto trade – that facilitates sanctions circumvention, then that is clearly a problem,” said Tom Keatinge, the director of the Centre for Finance and Security at the Royal United Services Institute, a London think tank.
Kyrgyzstan, a bête noire of sanctions enforcers since the start of Russia’s full-scale invasion of Ukraine in 2022, began tightening its financial rules after the US and UK sanctioned major Russian financial institutions in June 2024. Later that summer, the Kyrgyz national bank “demanded” private banks stop cooperation with the sanctioned entities to avoid secondary sanctions, the Kyrgyz outlet Tazabek reported.
By the end of August, 13 of 16 Kyrgyz banks had halted transactions with the sanctioned Russian banks, reporters from the 24KG news agency found. The national bank warned the sector again about sanctions compliance in February and July of this year, and fined four unnamed banks this summer for violating money laundering laws, though it is unclear whether those fines were linked to sanctions-busting behavior.
On January 15, however, the outgoing Biden Administration Treasury Department slapped sanctions on Kyrgyzstan’s Keremet Bank, alleging in a statement that the bank facilitated cross-border payments for Promsvyazbank, a state-owned Russian institution that finances the defense sector. British authorities sanctioned Keremet Bank in February.
Keremet Bank has rejected the allegations, and Kyrgyz officials have said they are working to lift sanctions on the bank, Kyrgyz outlet Kaktus reported. But in the meantime, the consequences have been serious. Keremet Bank lost more than 40 percent of its deposits after the US sanctions were announced, according to Kyrgyz news site Akchabar.
Western diplomats have not asked Central Asian states to cut trade with Russia entirely but have focused on stopping the flow of advanced technology critical to the Russian war effort, Keatinge said in an interview with Eurasianet. That limited message combined with the threat of secondary sanctions seems to be having an effect, and the recent drop in visits by Western sanctions officials to the region indicates that they see the biggest problems are now elsewhere, like Southeast Asia, Keatinge said.
“[Former Soviet republics] have, if you like, understood what it is that they need to do in order to have a quiet life,” he added.
In April, the Kyrgyz government announced a requirement that all ruble transactions flow through one bank – Capital Bank, which is controlled by the government.
Whether intentional or not, the new system is pushing Russians away from Kyrgyzstan. Citing Russian trade consultants and lawyers, the Russian financial news outlet RBC reported July 21, that Kyrgyzstan is “losing its status as a payment hub for Russian business,” as transfers through Capital Bank are increasingly delayed, commissions have doubled and some payments won’t go through at all.
There is skepticism of how deep enforcement goes.
A former Kyrgyz official told Insider, a Russian opposition media outlet, Capital’s goal is likely to monopolize Russian payments and not necessarily to weed out sanctions evasion. That report also pointed out that the board chair of Capital Bank is a former member of the board at Keremet Bank, which is in turn connected to Ilan Shor, a Moldovan-Russian oligarch allegedly involved with sanctions evasion efforts.
In late 2022, the US Treasury Department added Shor to its sanctions list “for having directly or indirectly engaged or attempted to engage in interference in a United States or other foreign government election for or on behalf of, or for the benefit of, directly or indirectly, the Government of the Russian Federation.”
The Kyrgyz presidential administration responded to concerns about Capital Bank in mid-April, saying the decision to route payments through it will allow the government to ensure sanctions compliance.
“The statements spread about connections with Ilan Shor and other institutions under sanctions are not in line with reality and are intended to discredit the financial system of the Kyrgyz Republic,” the president’s office said in a statement.
Capital has attracted western attention too. In May, US Ambassador to Kyrgyzstan Lesslie Viguerie and British officials separately discussed the bank with Kyrgyz officials, according to local press reports.
Yet, amid the signs the traditional banking sector is becoming less welcoming to sanctions evasion, Russians may simply be ditching cash for crypto.
In March of this year, the US Secret Service took down the sanctioned Russian cryptocurrency exchange Garantex and froze millions in cryptocurrency wallets on the exchange. Russians were using the exchange to buy dollar-pegged cryptocurrencies they could use on the international market.
Like crypto Whack-a-Mole, however, a Kyrgyzstan-registered cryptocurrency exchange, Grinex, quickly sprang up in Garantex’s place. Russians are now using a ruble-pegged cryptocurrency, A7A5, on that exchange and others to gain access to international markets, the Financial Times first reported.
More than $1 billion per day is now transferred through A7A5, much of it through Grinex, with total transfers by July 28 running to $41.2 billion, triple Kyrgyzstan’s GDP, according to a report by cryptocurrency analysis firm Elliptic.
A7A5 was launched by a company linked to Shor, the same Moldovan-Russian oligarch connected to Keremet Bank and other alleged sanctions-evasion schemes, according to a report by the Centre for Information Resilience, a British human rights organization.
“You can take your rubles, you can exchange into A7A5, no one’s going to scrutinize who you are, where your funds come from, and now you’re in the wild,” Keatinge said. “The role of Grinex in all of this as kind of the exchange of choice is obviously unfortunate and, you know, not a good look for Kyrgyzstan.”
An A7A5 representative told the Financial Times it is not a sanctions evasion scheme, but is merely a response to demand for cryptocurrencies connected to national currencies and is no longer linked to Shor’s company.
Kyrgyz authorities did not comment about the A7A5 or Grinex when asked by Radio Free Europe/Radio Liberty’s Kyrgyz Service in mid-July.
By Eurasianet.org
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