The risks associated with the refusal of Chinese banks to accept payments in yuan from Russia are identified

The situation is fraught with a fall in bilateral trade volumes

The sword of Damocles of secondary sanctions from Washington continues to make noise in jurisdictions friendly to Moscow. Thus, several Chinese banks have stopped accepting payments in yuan from the Russian Federation, although previously transactions were quite successfully completed in both Chinese banknotes and rubles. The situation is extremely unpleasant because it affects the core of bilateral trade, its key mechanism, based on mutual settlements. Plus, Russia has similar problems with Turkey, the UAE, India, and Armenia.

The banks that stopped accepting yuan payments from Russian clients included Ping An Bank and Bank of Ningbo, which rank 13th and 15th in the country in terms of capitalization. As well as six smaller credit structures – Great Wall West China, Dongguan Rural Commercial, China Guangfa, Kunshan Rural Commercial, Shenzhen Rural Commercial and China Zheshang.

Previously, three of the four largest banks in China – Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB) and Bank of China – stopped conducting transactions with sanctioned financial organizations in the Russian Federation.

Meanwhile, the problem is not limited to China alone. The other day, for example, the second largest bank in the UAE, Emirates NBD, stopped accepting transfers in rubles, stopped the work of its department focused on the Russian Federation and closed the accounts of Russian clients – companies and individuals. Since December, Turkey has almost completely stopped accepting money from Russian counterparties. True, payments were resumed in February, but for a limited list of goods – those that are not on Washington’s “black list”.

Let us remind you that in accordance with the decree of US President Joe Biden dated December 22, 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 certain types of 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.

“Of course, the situation is unpleasant, but quite expected,” says Artem Deev, head of the analytical department at Amarkets. – Firstly, our business has adapted to the endless “red flags” in relations with foreign partners and has provided backup options for itself. Secondly, the bulk of Chinese regional banks (and there are hundreds of them throughout the country) continue to interact with Russian legal entities as before. Thirdly, since mutual settlements in yuan are not visible to Western regulators, Chinese banks, although with caution, work with Russian enterprises.”

Finally, Deev argues, there is always the possibility of making payments through cryptocurrency, or using other friendly jurisdictions as a buffer: Uzbekistan, Kyrgyzstan, and even Armenia, whose banks will stop servicing Mir cards from March 30 due to the risk of secondary sanctions.

“The problems in Russia’s trade relations with friendly countries are multifaceted,” notes Alexey Vedev, director of the Center for Structural Research at RANEPA. – If we are talking about Turkey or Armenia, then it is absolutely unprofitable for them to lower the bar for cooperation with the Russian Federation, creating obstacles for their own citizens and economic growth. Let’s say that Armenia’s GDP increased by 12% in 2022 and by 9% in 2023, largely due to the efforts of Russian relocants, holders of highly qualified professions. China is a different matter. Moscow is extremely interested in maintaining the current level of trade with Beijing, but Beijing clearly gives priority to trade with America and the European Union. The threat of secondary American sanctions hanging over Chinese banks has a rather painful impact on us.”

The main risk here is a fall in bilateral trade turnover, the volume of both Russian raw material exports and technological imports from China. Foreign trade is based on mutual payments; if they are not carried out, trading is pointless. Most likely, Vedev summarizes, a solution will be found on the political plane, perhaps during Vladimir Putin’s visit to Beijing in the second half of May.

“The motives of the Chinese banking community are clear: the country’s largest financial institutions have assets in the United States and do not want to lose the local market. This is a business,” says BitRiver communications director and economist Andrei Loboda. – In their place, Russian banks, even state-owned ones, would probably have done the same. However, a way out of the situation is possible with modern technologies. It is necessary either to create a joint Russian-Chinese payment system registered in China, or to accelerate the process of creating a common BRICS settlement currency, and on the blockchain.”