How much impact will it have on Sino Russian trade if several Chinese banks stop accepting payments from Russia?

 

Date：[2024/2/22]
 

1、 Russian and American media are both reporting that several commercial banks in China have stopped accepting payments from Russian financial institutions.
On February 21st, Newsweek reported that China's three largest banks handling Russian payments have stopped accepting payments from Russian financial institutions, which has dealt a blow to trade relations between the two countries.
On February 7th, the Russian business newspaper Vedomosti reported that since February, the main Chinese bank used by Russian importers, Zhejiang Chouzhou Commercial Bank, has ceased its business in Russia.
Denis Rudenko, head of customs operations at Re Consulting, a Moscow law firm interviewed by the newspaper, said that in early February, they received information from all clients that Chouzhou Bank no longer accepts payments from any Russian bank. The existing payment has been returned with a message stating that the transfer does not comply with the internal rules of the receiving bank.
Vedomosti also stated that not only Chouzhou Bank, but at least three of China's four major banks have tightened their compliance review with Russian payment businesses.
Bloomberg also stated in a business message that after the release of a document on new US sanctions, Chinese state-owned banks have imposed restrictions on providing services to Russian clients. At least two banks have ordered inspections of their Russian clients, intending to sever ties with those working for the needs of the Russian military industrial consortium or assisting sanctioned companies. But transactions with sanctioned banks are still ongoing.
2、 Why did our bank suddenly tighten or even stop its payment business with some Russian banks?
After Russia's comprehensive invasion of Ukraine on February 24, 2022, the United States and the European Union have continuously escalated economic sanctions against Russia.
According to the Carnegie International Peace Foundation, the Russian economy has been subject to over 13000 sanctions, making it the country with the most sanctions in the world. Foreign exchange reserves have been frozen, and Russia has been cut off from the SWIFT (Global Interbank Financial Telecommunication Association) banking system.
On December 22, 2023, US President Biden issued Executive Order 14114 (Secondary Sanctions Act) to prevent foreign banks conducting business with companies supporting Russia's defense industry from entering its financial system. According to this order, the US Secretary of the Treasury, after consultation with the Secretary of State, may impose sanctions on foreign banks if it is proven that they have assisted in providing military, aerospace, and other technologies to Russia. The sanctions include prohibiting or restricting the use of proxy accounts in the United States, as well as freezing property within the jurisdiction of the United States.
This has brought new risks of secondary sanctions to financial institutions in our country. Because the bill has more specific sanctions against Russia and will impose secondary sanctions on third country financial institutions that help Russia evade assets. This bill has greatly affected the financial institutions of some friendly Russian countries that previously provided financial services for Russia's foreign trade, resulting in them having to suspend their financial services to Russia starting from the end of 2023.
As Pavel Bazhanov, a Russian lawyer who provides legal support for Russian companies in China, said, "Chinese banks are working hard to comply with US sanctions. Therefore, in order to reduce their own risks, US dollar settlements in trade with Russia have actually stopped and have been replaced by Chinese yuan settlements.". Some Chinese banks are currently suspending RMB payments to assess new risks and update their compliance requirements.
Vedomosti also explained this to Russian readers in its report. In this situation, although RMB settlement does not rely on the SWIFT system and is only carried out with the help of Russia's SPFS and China's CIPS, transactions have also been suspended. It is because even if Americans or Europeans cannot see the flow of funds through these systems, all of this is clearly reflected in the reports that Western counterparties may require banks to provide.
Iskander Mirgalimov, a foreign trade settlement consultant, confirmed that even if the counterparty does not use SWIFT, Western regulatory agencies can still obtain information about the flow of funds and goods between China and Russia. China CIPS is under pressure from SWIFT and is requesting information on financial transaction volumes with Russia.
In fact, as I mentioned in the article "The Bank of Türkiye Still Stops Accepting Russian Loans Due to Fear of European and American Secondary Sanctions" on February 19, and the article "The United Arab Emirates and Uzbekistan also Interrupt Payments to Russia, Pushing Russia Back to the Era of Barter Trade?" on February 20, since December 2023, not only Chinese commercial banks, but also the United Arab Emirates, Uzbekistan, Türkiye Commercial banks in friendly countries such as India have also suspended payments with Russia.
3、 What is the impact of some commercial banks in China tightening or suspending payment services with Russian financial institutions on Sino Russian trade?
In 2023, the total bilateral trade between China and Russia reached 240 billion US dollars, a year-on-year surge of 26%. At the same time, Russia has been promoted to the sixth largest trading partner of our country. In 2023, China's exports to Russia surged by 46.9%. After the Russia-Ukraine conflict, hundreds of global brands withdrew from the Russian market, leaving a gap that was quickly filled by Chinese enterprises.
Although in the second quarter of 2022, China and Russia began to adopt local currency settlement for trade, avoiding the risk of US dollar settlement. But as mentioned earlier, secondary sanctions also pose compliance risks for RMB payments. After all, of China's total trade volume of 5.94 trillion US dollars in 2023, China Russia trade only accounts for 4%. We cannot risk losing watermelons for this 4% trade.
So, there must be an impact, but the magnitude of the impact should be inversely proportional to the efforts of both countries to find alternative payment methods.
An official from the Russian Chamber of Commerce believes that "there is no reason to fall into a coma as a result, despite many companies facing difficulties, payments are coming soon, albeit at a slower pace than before. If you want to buy products made in China, then you can do so and pay slowly.".
Ilona Gorsheneva olunts, representative of the Russian Small Business Association (Opora Rossii), also believes that almost all of our clients have not paid in US dollars for a long time, but there have been issues with RMB transfers. After communication, Russian businessmen have learned that it is a compliance issue with Bank of China. But I also understand that although there are delays and lengthy inspections, there is no stopping statement.
Sergey Typlakov, a professor at the International Relations Department of the School of World Economics and International Affairs at the Russian Higher School of Economics, said that China's banking system is much more complex than Russia's banking system. The five largest state-owned banks in China, including the United States and the European Union, have branches or subsidiaries overseas, forcing them not to violate Western sanctions. As early as 2014, after Crimea was annexed by Russia, Bank of China was very cautious when conducting US dollar transactions with Russia. Now we are talking about RMB transfers, and at the same time, it cannot be said that all transactions with Russia have completely stopped, but compliance and inspection procedures have clearly become stricter. Ziplakov said that China is unwilling to harm its own interests in transactions with Russia, and logically wants to avoid Western sanctions on their banks.
According to The Times of India, India has started promoting physical payments for trade with Russia. Starting from January 2024, India will pay some of the crude oil import fees to Russia using bananas. The Indian side is still in discussions with Russia to consider using physical goods, including other fruits, to pay for the cost of oil imports.
This gives us an inspiration that in fact, China Russia trade can also return to the original barter trade model, which is the only trade settlement method that can avoid the risk of secondary sanctions.