Chinese banks are shutting down transactions with Russia over worries about losing access to the U.S. dollar and being cut off from the international financial markets, experts told the Kyiv Independent.
The U.S. issued an executive order in December 2023 warning that it would sanction any foreign financial institution supporting companies supplying goods to the Russian military.
Washington didn’t initially follow through with its threats but has recently amped up its aggression towards secondary sanctions, leading to China scaling back its business with Russian parties.
“(The U.S.) is saying ‘you are going to have to choose – do you want access to the U.S. dollar and the international financial system, or do you want to do a small amount of business with Russia,” Tom Keatinge, director of the Center for Finance and Security, a London-based research group, told the Kyiv Independent.
"You are going to have to choose – do you want access to the U.S. dollar and the international financial system, or do you want to do a small amount of business with Russia"
Trade between Russia and China has surged since the start of Russia’s full-scale invasion of Ukraine as Beijing exploits Moscow’s vulnerabilities. China has been buying up cheap Russian commodities, like oil, and has also become the leading source of dual-use goods for Russia that feeds its defense industry.
“The war underlines Russia’s dependency on China,” said Timothy Ash, a senior emerging market (EM) sovereign strategist at BlueBay Asset Management.
But Beijing is keen not to rock the boat when it comes to its relationship with the U.S., its top trading partner, according to Ash. China is also careful that the war doesn’t impact global markets, he added.
A large number of Chinese banks began shutting down transactions with Russia, including for electronics, out of fear of secondary sanctions. By mid-2024, Chinese banks were rejecting and returning about 80% of Russian payments made in Chinese yuan, the Russian state-controlled media outlet Kommersant reported on July 29, citing sources.
U.S. sanctions on the Moscow Exchange (Moex) in June have hindered Chinese banks and businesses from making foreign exchange (forex) transactions with Moex. The sanctions forced companies, banks, and investors to trade over the counter instead of trading dollars and euros via a central exchange.
“So (China) needs to find a counter-party, and they don't really want a Russian counter-party that is at risk of sanctions,” said Ash.
Washington’s increased aggression comes in the lead-up to the U.S. presidential elections and talks of peace negotiations that China is keen to be a part of. The hardened sanctions put pressure on Moscow to enter negotiations while putting Ukraine in a stronger position, Ash believes.
The sanctions and barriers to operating with Chinese businesses will weaken Russia’s economy, according to Ash. Following the sanctions on Moex, the ruble’s value to the dollar plummeted. While it clawed back in recent weeks, the ruble is showing much more volatility than at the start of the year.
The sanctions are unlikely to crash the economy, however. Chinese and Russian businesses will still find ways to work around the sanctions, said Keateringe.
“China may be using smaller banks to support this trade in military goods as they have no need to access the U.S. dollar and will not be impacted if they are sanctioned,” he said.
Russian businesses will nonetheless have to pay more to bypass the sanctions, Ash notes. Import costs will increase while export value goes down, complicating trade between Moscow and Beijing.
Ultimately, the fledgling transactions between Russian entities and Chinese banks highlight frictions between Moscow and Beijing’s relationship, Ash says. While China has not condemned Russia’s invasion of Ukraine it has held back from providing direct military support to Russia, unlike Iran and North Korea.
Despite Beijing and Moscow announcing a “no limits” partnership at the Beijing Winter Olympics in February 2022, China is walking a tightrope between the U.S. and Russia. It is treading carefully not to let the war tip the balance.
“The war in Ukraine is actually showing the limits in the Russia-China relationship. The relationship with no limits actually has limits,” said Ash.
The Kyiv Independent news desk
