EU Sanctions Rock Central Asian Banks: Kyrgyzstan Accuses of Political Motives

Brussels has delivered a significant blow to the financial sector across Central Asia, with the European Union announcing new sanctions set to take effect on November 12. Targeting a dozen banks and companies, including key institutions in Tajikistan, Kyrgyzstan, and Kazakhstan, the EU Council alleges these entities have been instrumental in circumventing existing European sanction measures. The move signals a critical escalation in the EU’s economic pressure campaign, extending its reach beyond direct restrictions on Russia.

In an immediate and strong rebuttal, Kyrgyzstan’s Ministry of Foreign Affairs vehemently rejected the accusations, signaling its intention to formally dispute the EU’s decision. Bishkek has called for an independent audit to thoroughly examine the operations of its financial institutions, asserting its commitment to international obligations and transparent cooperation with the European Union.

This latest round of restrictions, which not only impacts core sectors of the Russian economy but also extends to financial entities in the wider region, underscores a strategic shift by the European Union. Experts are highlighting this as a clear indication that EU sanctions are no longer solely aimed at Moscow, but are now being wielded as a tool to influence Central Asian nations and their banking systems. The message from Brussels is unequivocal: any country perceived as helping Russia mitigate the effects of Western sanctions risks facing direct pressure itself.

For the affected financial institutions in Kazakhstan, Kyrgyzstan, and Tajikistan, these restrictions translate into a complete prohibition on conducting any transactions with European legal and natural persons. While this could severely limit their access to international payment systems and complicate correspondent banking relationships, internal market operations and engagements with non-European partners are expected to continue, potentially utilizing alternative financial instruments and channels not subject to the new limitations.

A notable aspect of the new sanctions specifically targets digital currencies. The EU has imposed a blanket ban on transactions involving “A7A5,” a ruble-denominated stablecoin that has reportedly facilitated billions of dollars in settlements with Russia. The developer of “A7A5,” Old Vector, was already under US and UK sanctions, and with the EU’s latest prohibition, this technology is likely to become effectively inoperable for users globally, representing a significant curtailment of a key conduit for financial flows.

The Kyrgyz Republic’s Ministry of Foreign Affairs voiced deep regret over the inclusion of Kyrgyz companies in the EU’s sanctions list. The ministry reiterated Kyrgyzstan’s adherence to its international obligations and its ongoing commitment to an open dialogue with the European Union to prevent any sanction circumvention attempts. Bishkek emphasized its preference for an equitable partnership with the EU, believing it to be a more effective route to mutual goals than unilateral sanctions. Consequently, Kyrgyzstan has formally proposed an independent international audit to verify the basis for the imposed sanctions and suggested the establishment of a joint working group for data exchange, transaction monitoring, and risk assessment.

Echoing these sentiments, Kyrgyz President Sadyr Japarov, in an interview with the ‘Kabar’ agency, previously characterized sanctions against Kyrgyz banks by the EU and UK as politically motivated and lacking concrete evidence of their involvement in bypassing restrictions against Russia. The President recounted that following earlier sanctions, a proposal was made to the US Ambassador, Leslie Viguerie, by First Vice Prime Minister Daniyar Amangeldiev, suggesting independent auditors review the banks’ activities – an offer which, according to Japarov, was declined by the Ambassador.

Meanwhile, the National Bank of Tajikistan has announced it is closely monitoring the situation in collaboration with financial institutions and international partners, taking proactive measures to mitigate potential repercussions. Reassuring the public, the regulator confirmed that “banking services for clients in the Republic of Tajikistan remain accessible and are being provided as usual.” While internal operations, including transfers, account servicing, and mobile applications, continue uninterrupted, potential adjustments might affect specific international transfer routes, where additional scrutiny could be introduced. In Kazakhstan, Finance Minister Yerulan Zhamaubayev downplayed the impact of EU sanctions on VTB Kazakhstan, stating the bank holds a marginal position within the national banking system. He assured that even in an extreme scenario, deposit guarantee systems are in place, and the country’s banking sector remains stable, with major players operating normally under central bank oversight.

According to Stanislav Pritchin, head of the Central Asia sector at IMEMO RAS, the European Union is systematically identifying and selectively targeting banks involved in trade facilitation with the Russian Federation. This, he suggests, points to an EU strategy of pinpointing vulnerabilities in the networks supporting Russian economic ties. Pritchin highlighted Kyrgyzstan’s distinctive stance, noting that despite its relatively modest economic size, the nation demonstrates a firm resolve to maintain its trade relationships with Russia. This situation presents Central Asian nations with a stark choice: either align with the EU’s sanction strategy, potentially incurring economic costs from reduced cooperation with Russia, or actively seek alternative pathways.

Kyrgyzstan, in Pritchin’s view, appears to be pursuing the latter, aiming for adaptation while preserving its external trade links. This could involve designating specific financial institutions to manage settlements with Russia. Attempts at political dialogue with Western partners, aimed at explaining the difficulty of completely severing trade and engagement with Russia – a vital economic partner and investor – have proven largely ineffective. In this context, Bishkek is exhibiting a more consistent approach, while other regional states currently favor a more flexible position, striving for compromises.