Chinese banks have driven Russian business to a dead end: they refuse to accept payments

“Fearing secondary sanctions, Chinese financial institutions are breaking off relations with our suppliers.”

The problem with payments for Chinese imports, which arose back in December, has been supplemented with a new unpleasant story. Chinese banks began to reject Russian payments for components for electronics assembly; there is even a long-term contract. Previously, the blockage concerned the supply of finished goods, not parts. You can theorize as much as you like, but a way out of the impasse is not yet visible. Especially taking into account the factor of secondary American sanctions, which Beijing treats with the utmost seriousness.

Suppliers from China notify partners in the Russian Federation that they cannot receive payment from a Russian legal entity through Chinese banks. The situation concerns the so-called “kit kits” for assembling servers, data storage systems (DSS), laptops and other equipment. In general, in the first 2.5 months of 2024, the volume of shipments of any product (not just electronics and its components) from China to Russia decreased by 6-7% compared to January-March last year. According to the president of customs and logistics broker KVT Yulia Shlenskaya, half of domestic buyers do not receive payments to Chinese companies. Moreover, regardless of whether the goods or the sending bank are under sanctions.

Financial logistics when making payments through Chinese banks suffers for almost all goods and services, noted Vitaly Mankevich, Chairman of the Russian-Asian Union of Industrialists and Entrepreneurs (RAUIE). According to him, in December, people from the US Securities and Exchange Commission (SEC) “gathered the heads of Chinese banking organizations and threatened to impose sanctions against them if they revealed cooperation with Russian legal entities. Therefore, the prospects are not bright yet.”

Let us remind you that in accordance with the decree of US President Joe Biden dated December 22, 2023, foreign banks may be subject to secondary sanctions for helping sanctioned organizations in the Russian Federation with transactions. The list of goods for which assistance with delivery is prohibited includes machine tools, semiconductor and lubricants, test equipment for microelectronics, and optical systems. Violators face either full blocking sanctions or restrictions on correspondent accounts in American credit institutions. The situation is fraught with a serious drop in Russian-Chinese trade turnover and an increase in prices in the consumer market.

“Due to the shortage of components and kits of Chinese electronics, the cost of such products in the Russian Federation may increase by 15-30% in the next two to three months in conditions of shortage,” says Alexander Shneiderman, head of the sales and customer support department at Alfa-Forex. – The situation is really serious: fearing secondary sanctions, Chinese banks are breaking off relations with Russian business. The matter is complicated by the speedy approval and introduction of the 14th EU sanctions package. The document is aimed at stopping the workarounds for financial payments that Russia uses.”

However, Shneiderman argues, certain options for solving the problem still exist. Firstly, it is possible to reach an agreement at the level of top officials, since losses and stuck payments amount to billions of dollars. Secondly, it is possible to weaken, at least temporarily, Russian legislation regarding financial monitoring, cash and the use of cryptocurrency. Wanting to simply pay for the delivery, entrepreneurs face persecution and additional tax charges. Thirdly, you can use intermediaries: major market players have their own representative offices in China, and there are fewer problems with cross-border payments.

“The situation with blocking payments was quite predictable from the beginning,” notes Doctor of Historical Sciences, director of the Institute of Asian and African Countries at Moscow State University. Lomonosov Alexey Maslov. – The Chinese side has repeatedly warned its Russian partners about this, and while large companies in the Russian Federation were prepared, small and medium-sized enterprises were taken by surprise. Apparently, believing that this cup would pass from them. In fact, it is very disappointing that in China both government officials and banks so scrupulously follow American financial policies. As an “justification,” I note that they feel responsible for 1.4 million citizens and are sensitive to foreign trade payments and the potential threats associated with them to the population. At the same time, China does not want to spoil relations with either the United States or Russia.”

According to Maslov, the factor of secondary sanctions is a completely surmountable obstacle: in particular, Russian buyers of the same electronic components should turn to the services of small Chinese banks. There are many such organizations, and they take this risk more calmly. The solution to the problem is, rather, in the technical plane.

“Russia will probably have to create an alternative payment system in national currencies, which will be registered in one of the friendly countries,” says economist and communications director at BitRiver Andrei Loboda. – It is also possible to establish payments within the BRICS using state digital currencies. Moreover, the digital yuan circulates along with the traditional fiat yuan in the domestic Chinese market. Of course, this will require political will from different countries.”

Of course, Loboda summarizes, the actions of Chinese banks are far from a gift for Russian business, but they cannot cause significant damage to bilateral trade: the total trade turnover between Russia and China is growing, amounting to almost $57 billion in the first quarter of this year. At the same time, most of the mutual settlements carried out only in national currencies through financial institutions of the PRC specially created for this purpose.