According to sources, as the United States expands sanctions on entities assisting the Russian military industry financially, the trade chain through which China contributes to Russia’s aggressive war efforts has been severely disrupted. This has led China and Russia to urgently seek alternative payment methods to evade US sanctions.
Last week, the US Treasury expanded secondary sanctions on foreign financial institutions assisting Russian military industrial facilities. Foreign financial institutions engaging in transactions with the sanctioned Russian entities could face expulsion from the SWIFT international payment system.
Since the US imposed sanctions on VTB Bank, the only Russian bank with a branch in China, trade between Russia and China has been significantly hindered, as reported by Reuters. However, following Russian President Vladimir Putin’s visit to China last month, alternative payment channels have been established to temporarily evade sanctions.
Special authorized banks have been set up in border regions between China and Russia, allowing Russian companies to open non-resident accounts in Chinese banks to circumvent US sanctions. In 2023, the trade volume between China and Russia reached a record $240 billion, crucial for Russia’s revenue in sustaining its aggressive actions. The completion of these transactions depends on seamless payments.
This workaround currently involves smaller regional banks that have managed to evade the radar of US sanctions. It indicates that both China and Russia are increasingly resorting to complex measures to ensure the continuity of bilateral payments.
However, in trying to circumvent restrictions, some Chinese financial companies may inadvertently trigger US sanctions. Trading through banks in border regions facilitates intermediaries representing Russian companies to navigate between China and Russia more seamlessly. This plan primarily involves small banks with limited or no business with Western countries, thus minimizing potential impacts on the Chinese financial system.
Yet, the window for these banks to facilitate payments for Russian companies appears to be narrowing. A senior US Treasury official recently mentioned that efforts are underway to identify small banks with weak compliance measures still assisting in Russian military transactions.
Following Russia’s invasion of Ukraine in February 2022, Russian banks were expelled from the global SWIFT payment system. Many Western countries and companies have severed trade relations with Russia, increasing the importance of trade with Beijing for Russian authorities.
A banking industry insider revealed, “Following Putin’s visit, some banks in a Chinese province have begun opening NRA accounts for Russian companies within China.”
Another banking industry insider stated that only a few banks in the northeastern border region continue to cooperate with Russia.
The insider added, “We are not even talking about… large or medium-sized banks… no banks are cooperating with Russia. This is an issue we need to acknowledge.”
The People’s Bank of China and the National Financial Supervisory Commission did not respond to Reuters’ requests for comments.
Yevgeny Kogan, a professor at the Higher School of Economics in Russia and an investment banker, highlighted that as more Chinese enterprises face US sanctions, many might opt to cease any business dealings with Russia, potentially leading to a decrease in imports from China.
He further emphasized, “Sanctions on subsidiaries of Russian banks established in China could also pose problems.”
Last week, the US Treasury expanded restrictions on sanctioned Russian banks, including their foreign entities, such as VTB’s branch in Shanghai.
A source in the payment market noted, “The branch of a Russian bank in China that we all like to use has been included in the sanction list.” He anticipated that even Chinese banks might halt all transactions with this branch.
VTB had previously announced plans to double its staff in Shanghai to reduce customer queues for account openings. In response, VTB stated, “We do not comment on the activities of foreign entities.”
When Russian companies engage in transactions with Chinese trading partners, they require operational payment systems through banks to receive or make cash payments. Alfa Bank, Russia’s largest private lending institution, had been striving to establish branches in Shanghai and Beijing for months but without success.
The payment market source remarked, “US sanctions are the most frightening, including for our Chinese partners… they fear them.” Institutions facing secondary US sanctions may have their access to US dollars cut off, which causes concern for Chinese banks keen on maintaining global market access, despite the lucrative profits from their dealings with Russia.
The Central Bank of Russia stated that payment issues for Russia have led to reduced export revenue, disrupted supply chains, and increased import prices, affecting Russian oil companies with months-long payment delays.
Compared to the US and EU markets, Russia’s influence in China is limited. The payment market source noted, “In China, no one wants to be subject to secondary sanctions due to Russia and lose the global market. Whether it’s manufacturing companies or financial institutions, including banks, it applies to all.”
Another banking industry source indicated that Chinese partners could still pay through unsanctioned Russian banks; however, US restrictions pose a fatal blow as even specially authorized Chinese banks may cease settlements.
This source mentioned that Russian companies now have no choice but to open non-resident accounts in Chinese banks or establish subsidiaries within China with accounts opened domestically.