Russia-only payment hurdles with Chinese partners intensified in August, Reuters sources say

MOSCOW (Reuters) – Some Russian companies are facing increasing delays and rising costs for payments with trading partners in China, leaving transactions worth tens of billions of yuan in limbo, Russian sources with direct knowledge of the this problem.

Russian companies and officials have for months reported delays in transactions after Chinese banks tightened compliance following Western threats of secondary sanctions over ties to Russia. Sources said the problem has intensified this month.

Chinese state banks are shutting down transactions with Russia “en masse” and payments worth billions of yuan are being withheld, a source close to the government told Reuters, speaking on condition of anonymity.

China is Russia’s largest trading partner, accounting for a third of Russia’s foreign trade last year and supplying items such as vital industrial equipment and consumer goods that help Russia cope with Western sanctions. It also provides a lucrative market for many Russian exports that China relies on, from oil and gas to agricultural products.

After the U.S. Treasury threatened in June secondary sanctions on banks in China and other countries for dealing with Russia, Chinese banks began to take a very tough stance on transactions, said a source at one of the most major e-commerce platforms in Russia. It sells a wide variety of consumer goods imported from China.

“At that time, all cross-border payments to China stopped. We found solutions, but it took about three weeks, which is a very long time, trade volumes dropped drastically during that time,” the source said.

One workable solution was to buy gold, move it to Hong Kong and sell it there, depositing cash in a local bank account, the person said.

Sources told Reuters that some Russian companies used third-country intermediary chains to manage their transactions and avoid compliance checks by Chinese banks. As a result, transaction processing costs have risen to 6 percent of transaction payouts, from close to zero before, they said.

The sources spoke on condition of anonymity because of the sensitivity of the subject.

“For many small companies, this means a complete shutdown,” another source close to the government said.

The Kremlin acknowledged the problem but said economic cooperation was important to both countries and solutions would be found.

“With such volumes and in such an unfriendly environment, it is impossible to avoid some problematic situations,” Kremlin spokesman Dmitry Peskov said in a statement to Reuters.

“However, the truly partnership spirit of our relations allows us to discuss and constructively resolve current issues,” he said.

Transactions with China are not a serious concern for Russia’s top leadership, however, as payments in priority areas continue to flow smoothly and there is political will on both sides, a banking source told Reuters. Bilateral arrangements for large companies, such as commodity exporters from Russia and vital technology exporters from China, are still working well, while smaller companies that trade bulk goods are facing problems, the sources said.

Russian exporters have had no trouble getting paid for goods that China imports, such as oil or grain, another source close to the Russian government told Reuters.

Bilateral trade between Russia and China rose 1.6 percent to $137 billion in the first half of 2024, according to official Chinese customs data, after reaching a record $240 billion in 2023.

“Normal trade between China and Russia is in accordance with WTO rules and market principles, is not directed against third parties and is not subject to interference or coercion by third parties,” a Chinese foreign ministry spokesman told Reuters.

“We strongly oppose any illegal unilateral sanctions and ‘long-arm jurisdiction’ and will take all necessary measures to protect our legitimate rights and interests,” the spokesperson added.

Russia’s imports from China fell more than 1 percent to $62 billion in January-July 2024 due to payment problems, according to official Chinese statistics.

Russia’s central bank expects the country’s total imports from around the world to fall by as much as 3 percent this year.

“Imports will decline in 2024 due to strengthening payment and logistics sanctions barriers,” the central bank said, although it predicted the situation would improve over the medium term, according to draft monetary policy guidance published on 29 August. After Russian President Vladimir Putin’s visit to China in May, some local Chinese banks without a global business stepped in to handle bilateral payments. They would be beyond the reach of Western sanctions enforcers.

However, the sources pointed out that these banks often had outdated IT systems and lacked staff with the necessary skills.

The banking source said cross-border couriers were transporting transfer documents across the Russia-China border to be physically stamped and signed by Chinese bankers.

“Until the payment issues are resolved at the state level, we cannot expect a dynamic flow of investment from China,” said Kirill Babaev, head of the China Institute at the Russian Academy of Sciences.

Research co-authored by Babaev and released this month highlights the risks posed to Russia’s industrial sector, where China has become a leading supplier.

“In today’s situation, payment problems with Chinese banks particularly exacerbate this challenge, as there are currently no other major suppliers of many types of industrial equipment outside of China,” the research paper said.

Big companies in China, as well as India, are heavily dependent on the American and European markets, Dmitry Birichevsky, the head of the economic department of the Russian Foreign Ministry, said at a conference in Moscow on August 16.

“And they’re being told, ‘Guys, if you continue to work with Russia, we’re going to cut off your access to our market and choke off your oxygen supply,'” he said.