How a breakaway region near the Black Sea is helping Russia support rebels in eastern Ukraine.

An isolated, war-scarred enclave in the Caucasus Mountains has become a hidden financial crossroads for Russia’s shadow empire around the Black Sea.

Conflict-battered South Ossetia also has become an improbable financial gateway over the past three years.

About the size of Rhode Island, it has been the site of two wars between Western-leaning Georgia and Moscow-backed forces since the 1990s. Reminders of combat — toppled buildings and walls pockmarked by gunfire — rest among orchards, springs and mountain valleys. The population of roughly 50,000 largely speaks the native Ossetian tongue and maintains its traditions of homemade wine and salty cheese.

The Kremlin-backed rebel territories in eastern Ukraine — the self-proclaimed Donetsk and Luhansk people’s republics — are 400 miles to the northwest. And the battles there have no direct impact on life in South Ossetia.

Still, South Ossetia is a vital cog for Moscow’s reach into the Black Sea region.

The enclave’s murky international status gives Russia free rein to set up its own banking system outside the normal rules. While South Ossetia describes itself as independent, it relies on Russia for its security and for almost all of its budget revenue. Georgian officials say that no major decisions are made in the territory without Moscow’s approval.

The separate banking system, in turn, serves as a way to sustain the separatist eastern-Ukrainian economy as the war grinds on. More than 10,000 people have died in that conflict since 2014, according to the United Nations. Sporadic fighting continues between the rebels and Ukrainian forces.

The financial threads between the Kremlin and Ukraine’s separatists pass through a sleek office building on Stalin Street in Tskhinvali, the main city of South Ossetia.

There, a three-year-old institution called the International Settlements Bank handles financial transactions with separatist territories in eastern Ukraine.

Russia traded roughly more than $150 million in goods with rebel-held territory in Ukraine in the first half of this year using South Ossetia as the payment center, according to officials and tax records. At least 146 limited liability companies, the South Ossetian tax office said, were active this year in facilitating trade with the Russian-backed separatist territories.

“Ossetia is essentially like an offshore company,” said a lawyer based in the eastern-Ukraine rebel stronghold of Donetsk who specializes in foreign trade. He spoke on the condition of anonymity because he said he worried about repercussions for describing the system to a Western reporter.

“This scheme,” he said, “was clearly thought up by some rather sophisticated people.”

The arrangement — which lawyers, businesspeople and officials described to The Post, many also speaking on the condition of anonymity — works like a “triangle,” according to an adviser to separatist leaders in the Donetsk region.

Step 1:

Anytime someone in separatist territories wants to wire money to a company in Russia — and beyond — they do so by way of the International Settlements Bank in South Ossetia. (South Ossetia is the only entity that recognizes the eastern-Ukraine breakaway regions, making it the only place to have a formal banking relationship with them.)

Step 2:

The money is sent onward to Russia. (Russia recognized South Ossetian independence after the 2008 war. That allows Russian banks to transfer money to and from South Ossetia.)

Step 3:

The goods paid for by the transfers — including fuel, building materials and food — are shipped to eastern Ukraine, largely by truck from Russia over a shared border. (Rerouting cash and trade through South Ossetia lets Russia avoid the Western sanctions and opprobrium it would incur were Moscow to officially recognize Ukraine’s separatist republics.)

To be sure, Russia sends other aid to the separatists more directly. International monitors’ surveillance drones in recent months have repeatedly sighted truck convoys traveling at night from Russia into separatist territory and avoiding official border crossings.

Western and Ukrainian officials say Russia provides the rebels with troops and military and logistical aid. Russia denies providing any direct military support.

The South Ossetian connection provides a more formalized financial link that allows the roughly 3 million people living in the separatist-occupied territories to trade with the outside world.

The framework of the system goes back to 2015. That year, the International Settlements Bank opened on Tskhinvali’s Stalin Street. In Moscow, meanwhile, another financial institution was formed at almost the same time with almost the same name — the Center for International Settlements. It got a banking license in 2016.

And its chairman, Vyacheslav Mazurin, is a 1981 graduate from the Higher School of the KGB — an elite training ground for Russian spies. Mazurin declined an interview request made through a spokeswoman.

Officially, the two institutions have nothing to do with each other. Both banks rejected interview requests. CMRBank, as the Moscow institution is now called, said in a brief statement that it “carries out its activities in strict accordance with the laws of the Russian Federation.”

But lawyers, businesspeople and government officials said that they form the backbone of the sanctions-snubbing financial nexus between Moscow and eastern Ukraine.

“We can only trade through South Ossetia — and we trade successfully,” said Zakhar Prilepin, a nationalist Russian writer who served as an adviser to the separatist Donetsk People’s Republic government until earlier this year. “They sign contracts with Ossetia, Ossetia does with us, and you get this triangle.”

Source: The Washington Post