Russia may not be able to rely on the Chinese yuan as initially hoped, as banks in Beijing have to comply with U.S. regulations to avoid secondary sanctions.
On Thursday, July 4th, Elvira Nabiullina, the head of the Central Bank of Russia, stated that payment issues are one of the main challenges facing the Russian economy. Speaking at a press conference in St. Petersburg, she revealed that the Central Bank of Russia is considering all possible risks, including the risk of suspension of yuan foreign exchange transactions.
Since Russia’s invasion of Ukraine, economic sanctions imposed by Europe and the United States on Russia include the inability to use the SWIFT banking system. Consequently, Russia’s reliance on the Chinese financial system as a settlement partner has been growing.
However, several Chinese banks have recently tightened financing restrictions on Russian companies. This is related to the secondary sanctions announced by the U.S. Treasury in December 2023, targeting foreign banks doing business with companies supporting the Russian defense industry.
Nabiullina mentioned that since Russia still exports commodities such as oil and natural gas to global markets, Russia is not economically isolated.
“Payments are made when needed, and many countries’ economic entities require our market; economic interests exist,” she said.
When asked if Russian regulators see risks in suspending yuan foreign exchange transactions, Nabiullina said, “We have considered all risks.”
In February 2024, the three largest Chinese banks – Industrial and Commercial Bank of China, China Construction Bank, and Bank of China – stopped accepting payments from sanctioned Russian financial institutions.
According to the Russian newspaper “Izvestia” at that time, this decision was due to the risk of “secondary sanctions” from the United States. These banks rank first, third, and fourth respectively in terms of their assets in China.
The Russian business newspaper “Vedomosti” reported that in February, China’s Zhejiang Chouzhou Commercial Bank, a major bank used by Russian importers, also ceased operations in Russia.
Citing financial industry sources, the Russian newspaper “Kommersant” reported that in June, the Chinese bank’s Russian branch focusing on yuan payments suspended transactions with Russian banks sanctioned due to the Ukraine conflict.
Experts say this move shows how fearful Chinese companies are of violating U.S.-led sanctions.
Russian lawyer Pavel Bazhanov told “News Weekly” that Chinese banks are striving to comply with U.S. regulations to avoid sanctions. Therefore, to reduce their own risks, trading with Russia that was settled in dollars has effectively stopped, replaced by settlements in yuan.
Bazhanov stated that U.S. President Biden’s Executive Order 14114, issued on December 22, 2023, “has brought new secondary sanction risks to Chinese financial institutions.”
“Chinese banks are pausing operations to assess new risks and update their compliance requirements,” Bazhanov added.