The United States is reportedly drafting sanctions as a diplomatic leverage for Secretary of State Antony Blinken in negotiations with the Chinese Communist Party (CCP). These sanctions could potentially sever some Chinese banks’ links to the global financial system. US officials hope that this move will deter CCP’s commercial support for Russia’s military production.
According to sources familiar with the matter speaking to The Wall Street Journal, the above information was disclosed.
With Secretary of State Antony Blinken visiting China this week, the impact of such financial threats on Sino-Russian trade remains to be seen.
In recent months, the Biden administration has become increasingly concerned about CCP’s support for Russia’s defense industrial base. US officials have stated that this support allows Russia to circumvent Western sanctions on Moscow and provide supplies to the Russian military.
This will be one of the main topics of discussion during Blinken’s visit.
A senior official from the US State Department stated last Friday, “With China’s (CCP) support, Russia has significantly reconstructed its defense industrial base, which not only affects the battlefield in Ukraine but we believe poses a greater threat to the broader European security.”
The US is hoping to persuade the CCP government to make changes by issuing warnings about cutting off access to US dollars for Chinese banks and the potential impact on China-Europe trade relationships. These banks serve as crucial intermediaries for CCP’s commercial exports to Russia, handling payments and providing credit for clients’ trade transactions.
US officials have mentioned that if diplomatic measures fail to convince the CCP government to control exports to Russia, sanctions against Chinese banks are seen as an escalation option. In recent weeks, US officials have increased pressure on the CCP government behind closed doors, warning that the US is prepared to take action against Chinese financial institutions involved in the trade of such dual-use products at any time.
During Treasury Secretary Janet Yellen’s visit to China in early April, she explicitly warned the CCP that Chinese companies must not provide material support to Russia’s war against Ukraine, including support for Russia’s defense industrial base, otherwise they will face “significant consequences.”
As compared to regular sanctions targeting individuals and businesses, cutting off banks’ access to US dollars, the primary global trade currency, has broader implications and is typically seen as a last resort. Such sanctions often force banks to close, impacting their entire customer base. With China facing increasingly severe credit issues, these sanctions pose significant risks.
However, Alexandra Prokopenko, a researcher at the Carnegie Russia Eurasia Center and former employee of the Russian Central Bank, warns that these banks have gradually been replaced by lesser-known regional Chinese banks with minimal business in dollar-denominated economic sectors, so they are less concerned about US sanctions. Prokopenko stated that “the payment chain is slowly being rebuilt.”
In fact, major Chinese banks are very wary of US sanctions. Several sources informed Reuters at the end of last month that Chinese banks, as well as banks in Turkey and the UAE, are becoming more cautious about US secondary sanctions, starting to require written guarantees from their clients to ensure that the beneficiaries of related transactions or payments are not individuals or entities listed on the US Special Designated Nationals (SDN) blacklist. This has led to delays or even refusals in payments for Russian oil companies. The Kremlin confirmed the existence of payment issues at that time.
Russia launched its invasion of Ukraine in February 2022, and the US, EU, and allies have imposed multiple rounds of sanctions on Russia, including sanctions on Russian banks. These sanctions have prevented the Russian Central Bank from using about half of its foreign exchange assets, remaining with only gold and Chinese yuan.
US Congressman Gerald Connolly stated in February, “China (CCP) must understand that the same sanctions measures also apply to China. These sanctions have begun to have a real effect on Russia and are affecting Russia’s productivity, economic performance, and quality of life.”
“To be frank, China’s losses are much greater than Russia’s,” he added.
Secretary of State Blinken left for China on Tuesday. On that day, the European Union’s top diplomat for Asian affairs, Niclas Kvarnstrom, conveyed the EU’s stance to the CCP. He emphasized that if Beijing aims to improve EU-China relations, it needs to take a stance on Russia’s invasion of Ukraine and control its significant trade surplus with the EU.
According to Bloomberg, Kvarnstrom stated in an interview on Tuesday that CCP’s continued support for Russia after the Russian attack on Ukraine is a “major issue” in the tense relationship between the EU and China.
“We cannot ignore this in any of our relationships,” he said. “As a geopolitical actor, we must stand up for our interests, and that is precisely what we are doing in addressing economic imbalances and our own security concerns.”
Analysis suggests that as a US ally, the EU’s clear position towards the CCP during Blinken’s visit to China undoubtedly provides another diplomatic leverage for Blinken. This allows Blinken to make it clear to the CCP that if Beijing does not change its support for Russia, not only will Chinese banks face sanctions, but it will also not improve its already tense relationship with the EU.