According to reports from Russian media, a major Chinese bank has suspended transactions with Russian banks that are under U.S. sanctions to avoid secondary sanctions, dealing a significant blow to the Russian economy.
The Russian business newspaper Kommersant cited sources in the financial sector as saying that the Russian branch of Bank of China, the second largest Chinese lending institution operating in Russia, has stopped processing Renminbi payments for Russian banks sanctioned due to the Russia-Ukraine conflict since Monday, June 24th.
It is reported that China Merchants Bank, CITIC Bank, and most other Chinese banks have also started taking similar actions to respond to the latest round of U.S. secondary sanctions.
On June 12th, the U.S. Treasury Department announced a significant expansion of secondary sanctions against Russia, where any foreign financial institution engaging in transactions with sanctioned Russian entities would be viewed as directly cooperating with Russia’s military-industrial complex and would be expelled from the SWIFT international payment system.
This expansion has brought the number of sanctioned Russian entities to over 4,500, including major Russian banks such as Sberbank and VTB. The new sanctions have forced the major financial markets to immediately suspend trading in U.S. dollars and euros.
Facing the suspension of Renminbi transactions, a source quoted by Kommersant said, “This is not good news for the Russian market. It will not only increase the processing time for payments but also add extra costs.”
The source added that the most significant issue is that this move will further push sanctioned Russian industries towards conducting transactions through opaque intermediary institutions, reducing state control and increasing the risk of fraud. He mentioned, “If the funds are frozen, they will be returned in Rubles, but the exchange rate at that point is unclear.”
Alexey Fedoryaka, a partner at Sapozhnikov & Partners law firm, told Kommersant that the secondary sanctions targeting foreign bank subsidiaries in Russia pose the greatest threat.
It is reported that Bank of China will continue to cooperate with non-sanctioned Russian financial institutions.
In February 2022, Russia invaded Ukraine, resulting in Russian banks being expelled from the global SWIFT payment system. This has led to an increasing reliance on the Renminbi for international trade with Beijing. As of December 2023, Renminbi accounted for around one-third of Russia’s foreign trade, which was only 0.4% before Russia’s full-scale invasion.
Since Russian President Putin’s visit to China last month, the two countries have established alternative payment channels that can temporarily evade sanctions. This involves using smaller regional banks near the Sino-Russian border, specially authorized for Russian companies to open Non-Resident Accounts (NRA) in China to evade U.S. sanctions.
However, these banks acting as payment gateways for Russian firms will also face restrictions. A senior official from the U.S. Treasury Department stated this month that the department is working to identify small banks with weaker compliance departments that are still facilitating transactions for the Russian military-industrial complex.