Chinese Banks Reduce Assets in Russia Amid Sanctions and Payment Issue

Chinese banks are reportedly cutting back their assets in Russia due to the increasing impact of sanctions against Moscow following President Vladimir Putin’s invasion of Ukraine. These sanctions have made trade between Russia and its economic partner China more complicated, especially when it comes to financial transactions.

In the second quarter of 2024, according to Russian business outlet Frank Media, the Bank of China reduced its assets in Russia by 37%, bringing them down to 355.9 billion rubles, equivalent to about $3.9 billion. Meanwhile, the Industrial and Commercial Bank of China (ICBC) followed suit, cutting its Russian assets by 27%, to 462.4 billion rubles, or approximately $5.1 billion. Frank Media attributed these reductions to growing issues with payments between the two countries, as reflected in the banks’ financial reports. Both institutions were contacted by Newsweek for comments on the situation, but no responses have been provided as of yet.

While these major banks have scaled back, two smaller Chinese banks have taken a different approach. The China Construction Bank and China Agricultural Bank both increased their assets in Russia during the same period, by 27% and 9%, respectively. Still, Frank Media noted that even these smaller banks are slowing their business expansion in Russia due to “protracted difficulties with settlements” between the two nations, highlighting that the financial challenges between China and Russia are not isolated to the larger institutions.

Pavel Bazhanov, a Russian lawyer who provides legal support to businesses operating in China and the surrounding region, shared his insights with Newsweek. He pointed out that Chinese banks are tightening their compliance standards and have become more hesitant to process payments involving Russian clients. “Sometimes Russian banks, on behalf of their clients, in advance check with Chinese banks whether payments can be made for any particular client or transaction,” Bazhanov said. This shows a growing concern among Chinese financial institutions over whether they can legally process certain transactions without violating international sanctions.

However, Bazhanov emphasized that it remains possible to carry out payments in trade between Russia and China through Chinese banks or other financial channels. “It is still doable to make payments in Russia-China trade through Chinese banks and other channels, if the payments aren’t related to any sanctioned goods or persons,” he explained. This underscores that while there are challenges, trade between the two countries continues, albeit with more restrictions and hurdles to navigate.

Despite these growing issues, Putin has frequently touted the rising level of trade between Russia and China as a sign of economic resilience. In recent years, especially since the onset of the war in Ukraine in 2022, bilateral trade between the two nations has reached unprecedented levels, with China becoming a crucial partner in propping up Russia’s economy amidst Western sanctions.

Nevertheless, while Putin promotes this economic pivot away from Western markets, Chinese banks are becoming more cautious in their dealings with Russia. They are taking steps to avoid falling afoul of U.S. secondary sanctions, which have already begun to affect some of their operations. These sanctions, designed to limit the financial activities of entities doing business with Russia, are leading Chinese banks to delay or reject payment requests coming from Russia.

The roots of these difficulties trace back to the end of 2023, following an executive order by U.S. President Joe Biden. This order explicitly warned Chinese banks that they risk losing access to the U.S. financial system if they continue to engage in trade that supports Russia’s military industry. Given the global reach of the U.S. financial system, this threat has had a serious impact on how Chinese financial institutions approach their Russian operations.

This year has seen several Chinese banks outright refusing to process payments for Russian entities that have been sanctioned by the U.S. For instance, in May, the Russian division of the Bank of China stopped handling payments in yuan for Russian banks that were on the U.S. sanctions list. Similarly, ICBC, China CITIC Bank, and most other major Chinese lenders have taken comparable steps to distance themselves from transactions that could draw the ire of the U.S. government.

June saw another major disruption to financial transactions involving Russia, as sanctions were imposed on the Moscow Exchange. This led to a suspension of foreign trade settlements in dollars and euros, further complicating Russia’s access to global financial markets. With the Moscow Exchange effectively cut off from these key currencies, the country’s ability to engage in international trade became even more restricted.

In August, Russian media reported that 98% of Chinese banks were rejecting yuan-denominated transactions from Russia, illustrating the growing financial isolation faced by Moscow. As a result, Russian merchants and traders have been forced to rely on intermediaries to process these transactions, which significantly increases their costs due to the commissions charged by these middlemen. This added financial burden is making it even harder for businesses in Russia to maintain profitability in international trade.

These developments reflect a broader trend of increasing economic isolation for Russia as a result of its invasion of Ukraine and the sanctions that have followed. While China has provided significant economic support to Russia in recent years, Chinese banks are now clearly prioritizing compliance with U.S. sanctions and other international regulations over deepening financial ties with Russia.

This cautious approach by Chinese banks underscores the delicate balancing act that Beijing faces in its relationship with Moscow. While China is eager to maintain strong trade relations with Russia, especially in sectors like energy and raw materials, it is also wary of alienating its economic relationship with the West. For Chinese financial institutions, the risk of losing access to the U.S. financial system is too great to ignore, and this is shaping their approach to doing business with Russia.

Ultimately, the situation demonstrates the increasing complexities of international finance in a world where geopolitical tensions and economic sanctions are reshaping traditional alliances and partnerships. As long as sanctions remain in place and the threat of secondary sanctions looms large, Chinese banks are likely to continue scaling back their involvement in Russia, further complicating the financial environment for Russian businesses looking to engage in international trade.