Chinese banks faltered under the pressure of anti-Russian sanctions: what awaits the Russian economy

The Chinese bank Zhejiang Chouzhou Commercial, which has become the largest settlement center for domestic importers due to the convenient location of its headquarters in the city of Yiwu, a large logistics center, on February 7 stopped conducting transactions with Russian and Belarusian counterparties. Moreover, transactions were stopped through the international SWIFT system, and through the Russian SPFS (Financial Message Transmission System), and through the Chinese CIPS. Why the PRC decided to do this and how such incidents could affect the domestic economy, MK found out from experts.

Managers of Zhejiang Chouzhou Commercial Bank warned their counterparties about the termination of relations with companies from Russia and Belarus last week. Domestic businessmen pointed out that the decision was made on the eve of the “Chinese New Year” (February 10), which is a period of long holidays and weekends in China, when difficulties will definitely arise with the export of goods, at least until March. At the same time, information appeared in the domestic press that transactions with companies from Russia were limited by another influential financial institution, one of the three largest in China. She began to demand evidence of the absence of contacts with sanctioned persons, confirmation that the goods purchased by Russian businessmen are not intended for the military-industrial complex, are not sent to Crimea, etc. All this indicates that Zhejiang Chouzhou Commercial may not be the only Chinese financial institution that will ultimately refuse to conduct transactions with Russian business, fearing secondary sanctions from the West.

True, according to financial analyst Andrei Vernikov, the situation should not be dramatized; one simply should not perceive the Chinese banking system as a monolith. There are forces in China interested in developing economic relations with the West, and there are those who are focused on Russia. From an economic point of view, China and the United States are Siamese twins, their interests are strongly intertwined, so the Chinese authorities will at some points yield to the United States. Currently, China’s economy is not in the best shape and is heavily dependent on exports to the States.

At the same time, the situation with payments between Russia and China has already reached the highest level: the President of our country, Vladimir Putin, discussed this issue with the head of the People’s Republic of China, Xi Jinping, during telephone conversations on Friday, February 8. The leaders of the two countries agreed to continue work on creating a financial infrastructure to ensure the reliability of payments, noting that already over 90% of settlements between Russia and China are carried out in rubles and yuan.

Discussion of the issue at the political level gives hope that problems in conducting operations will not recur. However, experts urge that China’s payment capabilities should not be overly optimistic, since American influence in the world and economic ties between the United States and China should not be underestimated. “The reason for the difficulties that arose simultaneously in Russia’s mutual settlements with China and Turkey is the same. To put additional pressure on the financial structures of Russia’s strategic trading partners, the White House issued a decree signed by American President Joe Biden at the end of December, explains the behavior of the Chinese partners, Sergei Solovykh, head of the department for working with wealthy clients at Fontvielle Investment Company. “This document expanded the US Department’s ability to impose sanctions on those banks that are suspected of helping the Russian Federation circumvent restrictions.” At the same time, the States are not the main trading partners of these countries, but their share, together with the European Union, is significantly higher than that of Russia. For example, China traded with our country for $240 billion in 2023. However, in the combined tandem of the US plus the EU, the volume of trade in China is almost $1.5 trillion, that is, 6 times more.

“European and American regulators are able to control currency transactions not only through the SWIFT system, but also by analyzing comprehensive banking reporting, which a financial organization is obliged to submit to foreign regulatory authorities if it wants to operate on their territory,” the CEO of the logistics company RFK Group continues the conversation. Maxim Chepov. — Thus, for foreign regulators the work of a Chinese bank is quite transparent. If a financial institution wants to continue working with the EU and the US, then it is obliged to comply with sanctions against Russia.” Most likely, Chouzhou Commercial Bank assessed that its share of cooperation with the EU and the US is higher than the share of Russian-Chinese transactions. As a result, it is more profitable for them to refuse cooperation with Russian companies than to lose market share in Europe and the States, the expert believes.

It is unlikely that the leadership of the Middle Kingdom will make decisions that are contrary to the economic interests of the country, and systemically important banks will not ignore the possible risks of secondary sanctions.

However, the situation is not a stalemate. If in a similar case with Turkey (the banks of this country, fearing secondary sanctions, stopped transactions with Russian companies and individuals), whose financial system is limited to approximately 50 different banks, there is talk of creating a special credit institution, the main purpose of which will be to conduct mutual settlements between Russia and Turkey, then with China everything can be resolved even easier. The Chinese banking system is very extensive and is replete with medium and small banks, which are not as dependent on possible sanctions as large banks when it comes to choosing clients. As Solovyov noted, reorienting towards them will take some time, but this is a completely workable scenario that can be realized in the context of increasing sanctions pressure on Russia’s main trading partner.

“In the large Chinese financial sector there is a place for those who prefer to work only with the USA and Europe, and for those who will work only with Russia and its friendly countries,” Chepov believes. This situation will add difficulties to market participants, but it will not completely stop partnerships, the analyst is sure.

Moreover, if China loses its role as a payment operator, our country will find itself in a very difficult situation. “It will not be possible to find any new big partners for Russia’s exports,” says Vernikov. — India and China are economic giants and consume a lot of raw materials, so problems arising in mutual trade must be resolved. Surely, difficulties will continue to arise, but the leaders of China and Russia are committed to constructive cooperation. China’s economy is export-oriented and, in order to be competitive, it needs guaranteed supplies of not very expensive raw materials from Russia.”

In addition to politics, there is also commerce, in which the Chinese have been strong since time immemorial. According to Chepov, there is certainly no political will to end cooperation with Russia in favor of the United States, but each Chinese bank itself assesses the risks and opportunities for cooperation with our country and acts based on its own benefits.

The best strategy for Russia in the current situation, according to Associate Professor of the Department of Economic Theory of the Russian Economic University. Plekhanov Ekaterina Novikova, will follow the policy chosen by our state and continue to develop the financial infrastructure for mutual settlements with key trading partners. And here, in addition to China and Turkey, it is worth including Saudi Arabia, the UAE, and India.