Washington is tightening the screws on the last remaining banks in Europe still doing business with Russia.

The Treasury's top sanctions enforcement official, Acting Assistant Secretary Anna Morris, met in Vienna on Friday with Austrian officials and representatives of Raiffeisen Bank International to explain the bank risks being shut out of the U.S. financial system if it doesn't distance itself more clearly from Russia's war economy. Details of the talks weren't immediately available, and the bank and the Treasury declined to comment.

Under new powers it gained at the end of last year, the Office for Financial Asset Control, a financial intelligence and enforcement branch of the Treasury, can target foreign financial institutions that conduct or facilitate transactions or provide any service involving Russia’s military-industrial base.

The authority is the latest in a long line of powers allowing the U.S. to use its dominance of the international financial system to exert political leverage outside its borders. Exclusion from the dollar system would spell disaster for Raiffeisen and represent a serious embarrassment to European authorities, implying they were either unable or unwilling to live up to their rhetoric about punishing Russia for the biggest land grab in Europe in 80 years.

Raiffeisen says it has significantly run down its operations in Russia since Moscow's invasion of Ukraine two years ago: It has stopped taking new business, for example, reduced its loan book by more than half, and stopped correspondent banking operations, sharply narrowing the circle of people it does business with there. Its commission income — the fees it generates through its everyday business — fell by 43 percent last year as it drew in its horns.

However, Raiffeisen has been reluctant to sever ties completely with an operation that is the largest foreign-owned bank in Russia, and which generated some 60 percent of its profit last year (those profits remain locked in Russia by capital controls). As the prospect of a quick end to the war has faded, suspicions have grown that the bank is dragging its feet, hoping to revive the business once peace is restored.

Disengaging via Deripaska

Raiffeisen has insisted it is doing all it reasonably can to disentangle itself, but its chosen exit strategy is strewn with pitfalls. It intends to effectively swap its stake in the Russian operation for a 27.8 percent stake in Strabag SE, an Austrian-based construction group focused on Central and Eastern Europe. The precise mechanics of that swap aren't clear, but it's intended that Raiffeisen's Russian arm would transfer the stake as a dividend-in-kind to the Austrian parent.

By Raiffeisen's calculations, it would salvage around €1.5 billion from its Russian operations if the deal goes through as planned. By contrast, a fire-sale to appease the Treasury could see it lose everything.

The problem is that the Strabag stake was until recently owned by metals tycoon Oleg Deripaska, sanctioned by both the U.S. and the EU. Deripaska owned the shares through a holding company called Rasperia; on the same day Strabag announced the intended swap, it also announced that Rasperia had been taken over by another Moscow-registered holding company, AO Iliadis.

On the surface, that change of ownership removed an obstacle to the swap. But Iliadis was founded only seven months ago, and its ultimate beneficiaries are unclear. Consequently, the swap — which was intended to be completed by the end of this month — is still pending.

"RBI will only execute the Strabag deal when it is sure that the people behind Iliadis are not sanctioned," a spokesman told POLITICO on Friday. "To this end, it is conducting a comprehensive compliance process."

RBI is an arm of Austria's nationwide network of cooperative banks, with roots deep in the local economy and local and national politics; accordingly, it has enjoyed significant political cover from the government and the central bank. Vienna lobbied hard, and successfully, for Raiffeisen to be removed from a Ukrainian blacklist of perceived war sponsors before approving the EU's 12th package of Russia sanctions in December.

“I am confident that they are working on it,” Austrian National Bank Governor Robert Holzmann told POLITICO a week before Morris' visit, stressing the bank is “very much aware of opportunities and constraints” and is working hard behind the scenes to find a solution.

That solution has to balance several conditions.

"Number one is that you don’t want to have a solution that favors Putin," he said. "Number two, it must not hurt their main owners that are ultimately village banks across Austria.”

According to Raiffeisen's full-year report, even if it had to hand over its Russian operation for no compensation, it would still be left with more than enough capital to satisfy regulators. As such, the financial damage to those village banks would be painful, but limited.

“Whether and when they will find a solution, I cannot tell,” Holzmann said. "It is highly complicated."