U.S. Sanctions Squeeze Russian and Chinese Banks

Chinese banks have tightened their restrictions on payments from Russia out of fear of triggering U.S. secondary sanctions.

Will this make an impact in choking off Russia's war machine?

Finding Perspective: The latest batch of information on this comes from the Russian newspaper Kommersant, which reported at the end of July that trade between Russia and China is getting ever more difficult, with some payments between partners taking up to six months to be processed.

About 80 percent of bank transfers made in the Chinese yuan are also getting bounced back with no explanation after being stalled for weeks while banks decide whether they can go ahead, the newspaper reported, citing anonymous sources.

This follows a report from July 17 by Bloomberg in which several major Russian commodity exporters said that trade with China had become increasingly difficult due to direct payments made in the Chinese yuan getting stuck indefinitely or delayed.

In June, the Russian division of the Bank of China stopped processing yuan payments with Russian banks that had been sanctioned by the U.S. Treasury Department.

The Industrial and Commercial Bank of China (ICBC), China CITIC Bank, and most other large Chinese lenders have made similar moves.

How Did We Get Here? Beijing has emerged as a top partner for Russia since its full-scale invasion of Ukraine, with analyses of Chinese customs data showing that in 2023 90 percent of dual-use goods deemed "high priority" and used to make Russian weapons came from China.

The United States and its allies have been intensifying restrictions in recent months after multiple senior U.S. officials said that the supply of dual-use goods by China has had a substantial impact for Russian forces on the battlefield.

This latest round of pressure originated back in December 2023 when the United States authorized secondary sanctions targeting financial institutions involved in trade linked to Russia's military industry.

This prompted global banks from China to the United Arab Emirates, Turkey, and Austria to reduce transactions with Russia to avoid getting in the crosshairs.

The payment issues were also exacerbated in June when the U.S. Treasury rolled out a new package of expansive sanctions against Russia for its full-scale invasion of Ukraine, forcing the Moscow Exchange to halt dollar and euro trade.

Why It Matters: Sanctions and finding ways around them is a constant game of cat and mouse.

In early July, a top Russian banker said the sanctions-evading methods should be made a "state secret" because they kept getting shut down so fast.

Andrei Kostin, the head of Russia's second largest lender VTB and the banker who made those comments, called for a greater use of cryptocurrencies and other digital assets to facilitate payments, something that Bloomberg reported is increasingly being done in Hong Kong via Central Asia-based intermediaries at a growing frequency.

Worried about being targeted by U.S. secondary sanctions, China's big banks have limited their cross-border transactions involving Russia and Russian firms of late, with Chinese companies that trade with Russia instead moving to smaller banks or underground financing channels that are difficult to track and have less exposure to the international financial system.

Tom Keatinge, director of the Center for Financial Crime and Security Studies at the Royal United Services Institute, told me that this makes up a "burner bank strategy."

This is where China's trade with Russia becomes concentrated increasingly into institutions that are unlikely to have a contagion effect on the country's economy and that also are set up with no need for access to the international banking system and thereby limit the reach of U.S. sanctions.

By RFE/RL

More Top Reads From Oilprice.com

• Lucid Receives $1.5 Billion Lifeline from Saudi Investment Fund
• CNOOC Adds Massive Gas Reserves in South China Sea Discovery
• After Campaigning on Free Natural Gas, Erdogan Hikes Prices by 38%