By Tengo Gogotishvili | 2024-03-11

TBILISI -- Russia-backed South Ossetia, a breakaway region of Georgia, is helping the Kremlin and North Korea dodge international sanctions, according to intelligence officials.

In exchange for North Korean ammunition and missiles that Russia uses to attack Ukraine, Moscow apparently is helping Pyongyang gain access to the global financial system, The New York Times reported in February.

The White House said in January that it had evidence that North Korea had provided ballistic missiles to Russia and that it was seeking military hardware in return, the newspaper reported.

"Pyongyang also appears to have shipped up to 2.5 million rounds of ammunition, according to an analysis by a British security think tank," it added.

In exchange, "Russia has allowed the release of $9 million out of $30 million in frozen North Korean assets deposited in a Russian financial institution ... money that they say the impoverished North will use to buy crude oil," it said.

"In addition, a North Korean front company recently opened an account at another Russian bank."

That new account "is held in South Ossetia," anonymous US intelligence officials told the Times.

Both Russia and North Korea are heavily sanctioned -- Russia for invading Ukraine and North Korea for conducting a rogue nuclear weapons program.

If Moscow is allowing Pyongyang to use Russian banks or is releasing frozen assets, the government will have "crossed the Rubicon of willingness to deal with North Korea and to be a financial and commercial rogue," Juan C. Zarate, a former assistant US Treasury secretary and specialist on financial crimes, told The New York Times.

Georgia and Russia fought a brief war in 2008 over South Ossetia, a Russian-backed breakaway region of Georgia, which saw the Kremlin recognize the independence of South Ossetia and Abkhazia and the establishment of permanent Russian military bases there.

Questions raised

Only two banks in South Ossetia have licenses for business activity: Sberbank and Mezhdunarodnyi Raschetnyi Bank (also known as "International Settlement Bank" or MRB Bank), according to the National Bank of Ossetia website.

Both have been sanctioned -- Sberbank as the largest state-owned financial institution in Russia and MRB Bank for its links to occupied areas of Ukraine.

"MRB Bank has opened offices in the Ukrainian occupied territories of Kherson and Zaporizhzhia, and provides several banking services under the control of the Central Bank of Russia. It has established ATMs [automated teller machines] in the region and operates a local branch in Luhansk," the Open Sanctions website posted last June.

MRB Bank's main profits come from mining and selling coal from the Russian-occupied Donbas region of Ukraine, according to an investigation that Radio Free Europe/Radio Liberty's Ekho Kavkaza conducted in 2019.

At that time, the Russian deputy minister of economic development, Sergey Nazarov, coordinated the illegal business.

Direct supervision came through a company belonging to Serhiy Kurchenko, who is known as "[Viktor] Yanukovych's wallet," a reference to the deposed pro-Kremlin Ukrainian president.

The appearance of a bank outside Russia's borders is a logical step for traffickers of either money or goods, said Roman Gotsiridze, a former president of the National Bank of Georgia.

"There are about 300 banks in Russia. Until the Kremlin officially recognized Donbas, no one wanted to complicate their lives, but they wanted profits, which you're guaranteed from owning mines and mining and selling the coal," he told Kontur.

"Creating an 'intermediary' link in Tskhinvali diverts direct liability -- that is, the risk of additional sanctions -- from the Russian banks," he said.

"We all know that the oligarchs themselves call the Russian economy a distribution center," said Zviad Khorguashvili, a researcher at Gnomon Wise in Tbilisi.

MRB Bank was "nothing but a branch of the FSB [the Russian Federal Security Service]," he told Kontur.

Abrupt change in occupied Ukraine

MRB Bank announced at the end of 2023 that it was suspending activities in occupied parts of Ukraine without providing a reason.

The closure in Russian-occupied Ukraine is likely tied to the opening of a new branch in South Ossetia, analysts told Kontur.

The Russian banking sector no longer needs to hide its presence in parts of Ukraine that Russia calls its "inalienable" territory, and MRB Bank's services to North Korea are indispensable because the pariah Asian state is under sanctions.

"Transactions between Tskhinvali and Pyongyang are happening through a Russian bank, very likely through ruble transfers," said Gotsiridze, the former National Bank of Georgia president.

"But it will be very hard to track this bank and the whole chain," he said. "North Korea could use this money to buy food or fuel, which the country doesn't have enough of, and in exchange give Russia missiles and other weapons."

Evidence is already mounting that Russia has been using North Korean weapons to hit Ukrainian cities, killing Ukrainian civilians.

"Short-range ballistic missiles supplied by Pyongyang hit Ukraine on 30 December, 2 January and 6 January," the United Nations (UN) Security Council said in a summary of its January 10 session, quoting South Korean ambassador to the UN Joonkook Hwang.

Therefore, North Korea has used Ukraine as "a test site of its nuclear-capable missiles," he said.

Given the timing, MRB Bank might have decided that operating in Russian-occupied Ukraine no longer had prospects and that concentrating entirely on dealing with the Pyongyang regime would be more promising.

MRB Bank customers in Donbas had the option of transferring their deposits to a "partner bank" whose name differs by only one word in Russian: the Center for International Settlements (CMR Bank), as opposed to the erstwhile International Settlement Bank.

CMR Bank is based in Moscow.

Like MRB Bank, "[CMR Bank] is another branch of the FSB," Khorguashvili of Gnomon Wise said.