On June 12th, the United States announced unprecedented strict sanctions against Russia, posing a significant risk for Chinese banks in the future. Any cooperation with sanctioned Russian entities may face secondary sanctions and be kicked out of the SWIFT international clearing system. Experts believe that the U.S. sanctions effectively serve as a deterrent, acting like a time bomb, making Chinese banks wary of engaging in transactions with Russia.
The executive order issued by the White House in December authorized the Treasury Department to impose sanctions on foreign financial institutions that support Russian military industrial bases. The new sanctions announced on June 14th differ in significantly expanding secondary sanctions on Russia. Any foreign financial institution engaging in transactions with sanctioned Russian entities will be deemed as directly cooperating with Russian military industrial bases.
The number of entities subject to sanctions has increased to over 4,500, including major Russian banks such as Sberbank and VTB. However, transactions involving agricultural products, agricultural equipment, pharmaceuticals, and medical equipment are exempted from the sanctions.
Although financial sanctions cannot completely halt the circulation of illicit goods, they can create bottlenecks, making it harder for Russia to access key technologies and raising the prices of goods.
The U.S. government believes that after two years of comprehensive invasion of Ukraine, Russia has transformed its economy into a war economy, with various industries contributing to Russia’s war efforts.
Historically, the majority of U.S. secondary sanctions targeted Iran and North Korea, but this time the focus is primarily on China and Russia. Analysts view the latest sanctions as a “paradigm shift”, marking the first attempt by the U.S. to implement a global financial blockade against Russia.
Despite facing extensive Western sanctions, Russia’s ability to continue its aggression in Ukraine is aided by China’s continued export of dual-use technology products such as machinery and microelectronics, enabling Russia to sustain its weapon production.
During a press conference in Prague on May 31st, Blinken stated that 70% of the machinery imported by Russia comes from China, and 90% of its microelectronics products also originate from China.
This round of sanctions includes multiple Chinese suppliers and intermediary institutions for Russian military industrial bases.
The U.S. sanctions coincide with the G7 summit in Italy, where G7 leaders pledged to continue taking actions to combat entities providing substantial support to Russia’s war machine in China and third countries. This includes financial institutions compliant with G7 legal systems and other Chinese entities facilitating Russian defense industry access to necessary items.
Su Ziyun, director of the Institute of Strategic Studies and Resources at the Taiwan Institute for National Defense Security, stated that the U.S. sanctions further strangle Russia’s war support capabilities strategically. With funds and logistics supporting artillery and missile equipment on the forefront of war, inhibiting these financial flows and material supplies hampers Russia’s ability to sustain its military operations.
“These latest U.S. sanctions, along with allowing Ukraine to use U.S.-made or NATO weapons to attack military targets within Russia, constitute a dual attack combining physical strikes on the frontlines and cutting off the financial lifeline from the rear, with the goal of achieving a decisive outcome in Ukraine as soon as possible.”
Su Ziyun added that previous sanctions on large Russian enterprises or banks did not usually affect the general population’s foreign currency deposits. However, with the increase in secondary sanctions and the expanded list of entities, the repercussions of Russia’s war efforts are indirectly spreading internally, gradually impacting the daily lives of Russian citizens and potentially affecting satisfaction and support for the government.
The latest sanctions aim to prevent small-scale banks, especially Chinese ones, from providing war funds and technology to Russia.
U.S. Treasury Secretary Yellen stated on the 13th that “I believe Chinese large banks value their correspondent relationships very, very much. Those banks are not our primary concern.” She added, “It is the ‘small banks’ that are more of a concern; some of these banks also hope to handle dollar payments and do not want to be cut off from the U.S. financial system.”
Due to their integration into the global financial system, large Chinese banks have structures and operations similar to those in Europe and America, following the same set of sanctions plans. Hence, they are less likely to be targeted for sanctions. Following the announcement of sanctions on Russian banks in 2022, large Chinese banks immediately ceased transactions with Russian entities.
In 2015, 90% of trade between China and Russia was settled in U.S. dollars. However, currently, most of China’s trade with Russia occurs outside the dominant SWIFT international clearing system controlled by the U.S.
According to the mainland’s “Economic Daily”, Russia’s Deputy Prime Minister Belousov stated that nearly 95% of bilateral trade between China and Russia is settled in rubles and Renminbi, with the two countries breaking away from third-country currencies in settlements in 2023.
The “China Business Development Report in Russia (2023)” shows that several Russian banks have access to the China International Payment System (CIPS) for cross-border payments, with many Chinese banks, especially local city commercial banks, joining Russia’s Central Bank Financial Messaging System (SPFS).
However, financial institutions from third-party countries, like China, engaging in trade with Russia, primarily settle transactions in U.S. dollars, and these institutions will go to great lengths to avoid U.S. sanctions.
The U.S. sanctions on Russia last year have already shown some effects, as reported by Russian media, that major Chinese commercial banks, including the Industrial and Commercial Bank of China (ICBC), refused to accept payments in Renminbi from Russia since the end of March, leading to numerous transactions being blocked.
A recent report by Chinese and Russian scholars revealed that due to the impact of Western sanctions on Russia, as of the end of March 2024, 80% of payment settlement operations between China and Russia had been forcibly suspended.
Data from the China Customs Administration showed a 15.7% year-on-year decrease in China’s exports to Russia in March.
In a report by “First Financial” in February of this year, a manager from an electronics company listed in Guangdong stated that almost all major Chinese banks have suspended settlements with Russia since early March. Some rural banks in the northeastern regions bordering Russia still accept payments, but it takes several months to open an account.
The “South China Morning Post” reported last month that many Chinese exporters have faced delayed payments from Russian customers, causing a surge in people lining up at the VTB Bank in Shanghai to open new accounts.
Wang Zheren, assistant researcher at the Taiwan Institute for National Defense Security, pointed out that large state-owned banks have diversified sources of profits, and the attractiveness of Russian business is not significant. However, some smaller Chinese banks value these transactions, and they do engage in trade with Russia.
“However, during the latest round of U.S. sanctions at the end of last year, these small Chinese banks, such as Ping An Bank, Ningbo Bank, and Zhejiang Chouzhou Bank, immediately halted Renminbi transactions from Russia due to fears of secondary sanctions.”
Wang Zheren explained that besides small Chinese banks dealing with Russia, the main channels for financial transactions are still through the Russian banks’ branches in China. For instance, if a Chinese car manufacturer sells cars to Russia and the Russian company needs to make payment to the Chinese company, they would use a Russian bank, such as the Bank of Moscow, which will then notify the Beijing branch to process the payment. Conversely, if importing energy from Russia, the Chinese company would have to make payments to Russia, requiring them to visit the Bank of Moscow’s Beijing branch to make the payment to Russia.
“These branches are now experiencing long queues for transactions. These banks are the direct targets of the current sanctions,” he said. He added that transactions could also be done through Chinese banks. Two out of the four major Chinese banks have branches in Russia. However, they fear being sanctioned and prefer to avoid such transactions.
Another category of banks closely connected to Russia’s financial system are smaller banks that were originally intended by the Chinese Communist authorities for de-dollarization experiments, as a means to bypass U.S. sanctions during wartime and support Russia’s military.
One example of this is the “Sino-Russian Financial Alliance” established in October 2015, initiated by Harbin Bank and the Federal Reserve Bank of Russia, aiming to promote the use of local currencies in bilateral settlements. Initially comprising 35 financial institutions, with 18 from China and 17 from Russia, the membership increased to 70 institutions by 2019.
After the U.S. announced sanctions on Russian banks, large Chinese banks immediately stopped transactions with Russian entities. However, the medium and small banks within the Sino-Russian Financial Alliance can still utilize cross-border bank payment systems like CIPS or cash as alternative payment and settlement infrastructure, assisting Russian entities to evade sanctions.
Currently, among China’s 4,500 regional banks, some have established proxy relationships with Russian banks. For instance, Harbin Bank’s customs clearance and settlement network covers the entire territory of Russia.
Reports have circulated that in June, Russia’s payment system will add four new members – Jilin Bank, Changchun Rural Commercial Bank, Changchun Development Bank, and Yanbian Rural Commercial Bank. These four banks will jointly utilize Harbin Bank’s ruble channel for transactions.
Wang Guochen, assistant researcher at the China Economic Research Institute, mentioned that large Chinese banks cannot conduct business with Russia, so they must go through smaller banks. To some extent, this is likely dictated by the Chinese Communist regime, as most Chinese banks remain under its control.
“As for de-dollarization, the internationalization of the Renminbi is wishful thinking and faces significant challenges. To advance this goal, Renminbi must become a substitute for the U.S. dollar to yield a de-dollarization effect, and critical prerequisites include the free convertibility of the Renminbi.”
“The U.S. need not worry about de-dollarization because if the Renminbi were to function as a trade currency, it would inevitably lead to a massive loss of U.S. dollars for China. Others would need Renminbi to exchange for U.S. dollars.”
How will the current round of U.S. sanctions affect the Chinese banking industry?
Wang Guochen believes that specialized institutions like Harbin Bank, which focuses on business in Russia within the Sino-Russian Financial Alliance, are unlikely to be affected. Since small banks do not use the Swift system, the U.S. cannot intervene. However, the transactions between small Chinese banks and Russia can still be technically traced. Fundamentally, Russia does not trust the Renminbi and seeks ways to convert it to U.S. dollars, which the U.S. can trace.
Yu Ping mentioned that the U.S. sanctions are unlikely to push these small banks to closure. Unless the sanctions lead to a mass exodus of clients, but currently, if the China-Russia business grows, customers will not leave.
Wang Guochen stated that if these small banks face sanctions and any associated links with the six major banks in mainland China are discovered, they might be implicated and subjected to secondary or tertiary sanctions. As more small banks face sanctions, it may eventually impact the six major banks.
“Expecting the U.S. to be so stringent with its measures against China’s six major banks may take time,” he said. However, for significant amounts, it is probably necessary to process transactions through the six major banks, which will likely suppress some of the China-Russia trade.
Yu Ping expressed that sanctioning small banks now might lead to further scrutiny of potential connections with large banks in the future. Any further sanctions on major banks should be approached with caution by the U.S., as this would be a direct challenge to Beijing.
“Unless the large Chinese banks disclose their business relationships with these small banks conducting transactions with Russia. Otherwise, it is challenging to monitor them. However, this is a hidden time bomb, and at some point, something will come to light. Many Chinese large banks are listed in the U.S., and U.S. sanctioning bodies may request information disclosure.”
While the U.S. sanctions may not have immediate substantial effects, it does serve as a deterrent, causing concern among major commercial banks that they may be exposed through third-party disclosures and might hesitate to engage with small banks handling transactions with Russia.
The Chinese authorities also seem to be apprehensive about the U.S. secondary sanctions. In May, Putin proposed to Beijing to expand the activities of Chinese banks in Russia; however, the proposed level of cooperation falls significantly below Russia’s expectations.
Despite large Chinese banks beginning to restrict cross-border transactions with Russia and Russian enterprises, Chinese companies engaged in trade with Russia are turning to small banks or underground financing channels that are difficult to track and less influenced by the international financial system.
Wang Zheren mentioned that while on the surface or in the short term, the convergence is inevitable, China’s primary goal is to compete with the U.S. by establishing a global financial system independent of the U.S. It is unlikely that China will forego these efforts due to sanctions, but financial sanctions will undoubtedly make Chinese financial enterprises more cautious.
Wang Guochen stated that after facing increased sanctions, Russia will undergo a likening to North Korea in terms of economic conditions. While North Korea has not collapsed in the face of sanctions, it has become increasingly chaotic and authoritarian. Russia is also moving towards becoming more domestically oriented, eventually evolving into an increasingly authoritarian regime.
Su Ziyun noted that it is challenging to evade U.S. sanctions, and Beijing is aggressively striving to enhance the Renminbi’s position in the market. However, the most extensive consumer market remains in the U.S. and Europe, and there is no way to circumvent this fact. Being in close alignment with Russia, increasing distance from the major markets in the U.S. and Europe will strain Russia’s ability to sustain China. This places China in a strategic dilemma.