US sanctions squeeze Russian and Chinese banks

Chinese banks have tightened restrictions on payments from Russia for fear of triggering secondary US sanctions.

Will this have an impact in choking 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, trade between Russia and China becomes increasingly difficult, with some payments between partners taking up to six months to process.

About 80 percent of bank transfers made in Chinese yuan are also being recovered without explanation after being blocked for weeks while banks decide whether they can move forward, the newspaper reported, citing unnamed sources.

This follows a July 17 Bloomberg report that several Russian exporters of goods said that trade with China had become increasingly difficult because direct payments in Chinese yuan were blocked indefinitely or delayed.

In June, the Russian division of the Bank of China torn off processing yuan payments with Russian banks that had been sanctioned by the US Treasury Department.

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

How did we get here? Beijing has become a top partner of Russia since its large-scale invasion of Ukraine, with analyzes of Chinese customs data showing that in 2023, 90% of dual-use goods deemed “high priority” and used to make Russian weapons came from from China.

The United States and its allies have stepped up restrictions in recent months after several senior US officials said China’s supply of dual-use goods had a substantial impact on Russian forces on the battlefield.

This latest round of pressure came in December 2023, when the United States authorized secondary sanctions targeting financial institutions involved in trade related to Russia’s military industry.

This has prompted global banks from China to the United Arab Emirates, Turkey and Austria to cut back on transactions with Russia to avoid getting into the move.

Payment problems were also exacerbated in June when the US Treasury launched a new package of expansive sanctions against Russia over its large-scale invasion of Ukraine, forcing the Moscow Stock Exchange to halt trading in dollars and euros.

Why does it matter: Sanctions and finding ways around them is a constant game of cat and mouse.

In early July, a top Russian banker said that methods of circumventing sanctions should be turned into a “state secret” because they were closing so quickly.

Andrei Kostin, head of Russia’s second largest lender VTB and the banker who made the comments, called for greater use of cryptocurrencies and other digital assets to facilitate payments, which Bloomberg reported it is increasingly made in Hong Kong through Central Asian intermediaries with increasing frequency.

Worried about being targeted by secondary US sanctions, China’s big banks have limited their cross-border transactions involving Russia and Russian firms of late, with Chinese companies doing business with Russia instead moving to smaller banks or underground financing channels which 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, said that this constitutes a “burning bank strategy”.

Here China’s trade with Russia is increasingly concentrated in institutions that are unlikely to have a spillover effect on the country’s economy, and which are also established without needing access to the international banking system and thus , limits the scope of US sanctions.

Via RFE/RL

More top reads from Oilprice.com