It is cast as an ‘unbreakable friendship’. In reality, Moscow is a supplicant to Beijing whose most important relationship lies with Washington. In 2023, notwithstanding Kremlin boasts, Russian goods accounted for just 5.1% of all Chinese imports, and Russian sales accounted for only 3.3% of Chinese exports. Chinese trade with North American and Asian markets far exceeds the Russian market. There was always a possibility the imperatives of trans-Pacific and pan-Asian relations would trump Putin’s foolish ‘special military operation’. This has now happened. This article explains how Chinese banks threaten not just to hole Putin’s war below the waterline, but to sink the ship.
Pay (not) Pals
At the end of 2023, Russian importers of goods from China could still send payments in dollars to China either through SWIFT or correspondent arrangements (making rouble-yuan transactions). The introduction of secondary sanctions closed this loophole. Beginning in December, a number of Chinese banks announced they would no longer accept dollar payments.1 At the same time, all Turkish banks refused to accept payments from Russia in any currencies – dollars, roubles, or liras.2 Gulf States’ banks similarly started tightening regulations.
At the beginning of February, Chouzhou Commercial Bank – a key settlement centre for Russian importers3 – stopped all transactions with Russia (in any currency or system: international SWIFT, Russian SPFS or Chinese CIPS). It took the decision on the eve of the Chinese New Year and a two-week holiday. This created an impasse for many Russian importers who were effectively unable to settle transactions at least until March.
In the third week of February, the three largest banks in China – Industrial and Commercial Bank of China (the world’s third largest bank by market capitalisation), China Construction Bank, and Bank of China – also stopped accepting payments from sanctioned Russian financial organizations – on any system – due to the risk of falling under secondary sanctions. In the case of Bank of China, a lengthy form must be completed for each transaction. Any transaction relating to the LPR, DPR, Crimea, Iran, North Korea, Cuba or Syria; or connected with the Russian military or military-industrial base, is rejected.
By March, multiple Chinese banks were rejecting payments in yuan, not just dollars (rejection of yuan payments had actually started in January). These included Ping An Bank, Bank of Ningbo, DBS Bank, Great Wall West China Bank, China Zheshang Bank, China Guangfa Bank, Kunshan Rural Commercial Bank, Shenzhen Rural Commercial Bank, and Dongguan Rural Commercial Bank. All Chinese banks with international partnerships also stop yuan payments (CitiBank, Standard Chartered Bank, HSBC, JP Morgan, BNP Paribas, Deutsche Bank and Mizuho Bank).
Smaller players are now starting to follow the example of the large banks and are introducing tighter regulations. In an inter-connected world of international finance, no party can truly isolate itself, witness the financial crisis of 2008-2009, any more than the internet can be compartmentalised however much authoritarian leaders dream of ‘closed’, sovereign internets.
Real world consequences
Chinese imports fall sharply: With almost 80% of payments to China now rejected, Russian road freight transportation to China has experienced a sudden slowdown in demand by as much as 30%. Imports from China fell by 16% in March.Problems with payments have also affected Turkey, Central Asia and Transcaucasia to varying degrees. Russian owner of the freight exchange ATI.SU has commented, ‘Unfortunately, following the results of the first quarter, the terms of payments between Russia, China and Turkey increased on average from two to four days to three to four weeks,’ with the inevitable knock-on delays to the supply of goods and services.
IT components blocked: From 10 April, Russian electronics manufacturers reported to business newspaper Kommersantthat payments for components for electronics had stopped completely. Humiliatingly, this turn of events occurred the day after Foreign Secretary Lavrov met with his Chinese counterpart Wang Yi, and later President Xi Jinping. In the reporting of Kommersant:
‘Since the end of March, domestic electronics manufacturers have been receiving letters from Chinese partners stating that payments from a Russian legal entity are not going through Chinese banks…According to them, banks began to block payment for the supply of components and kits for assembling electronics (‘kits’ which includes processors, device cases, screens, etc.), including servers, data storage systems (DSS), laptops and etc.’
Kommersant’s source clarified that payments were blocked ‘even for those organizations that have entered into long-term contracts for the production and supply of components for electronics assembly with Russian clients.’ This means domestic developers that ordered components from China cannot begin the final assembly of their products (including military kit) in the Russian Federation. A Russian electronics manufacturer spokesperson assessed there will be ‘delays in the production of domestic electronics for about six months, since in the next two to three months there will be no shipments of components and assembly kits to any Russian manufacturer.’
Ways round the sanctions
Sanctions can be circumvented. There are still numerous financial organizations in the Russian Federation that are not subject to sanctions. These continue to make payments with China. Sanctioned financial entities, and importers-exporters dependent on reliable, timely payments, have been opening representative offices in China, or in third-party ‘friendly countries’. VTB (bank) is an example. In keeping with local legislation, VTB in Shanghai is classed as an autonomous Chinese bank; it can make payments in yuan and roubles between China and the Russian Federation. Hong Kong is a greatly favoured intermediary for sanctions evasion, including for the supply of electronic components. The game of sanctions and sanctions evasion has far from run its course.
Even so, there are penalties and they are serious. Delays, frictions, and intermediaries all add burdens and costs to businesses. There is no end in sight. Rather, Russia under Putin faces a bleak, isolated future as a pariah state – the most sanctioned country in history and only country in the world banned from the Olympic Games. It is not a more multi-polar world as the Russian foreign ministry nonsensically trumpets. It is the same world. Nation states are doing what they always do, weighing their interests and acting accordingly. The rest of the world is not joining Russia, it is leaving Russia behind. Importantly, the stance taken by China’s banks unmasks – if there was any doubt – that China is not on Russia’s side.
Sergio Miller
Sergio Miller is a retired British Army Intelligence Corps officer. He was a regular contributor and book reviewer for British Army Review. He is the author of a two-part history of the Vietnam War (Osprey/Bloomsbury) and is currently drafting a history of the Russian invasion of Ukraine.
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Sergio Miller#molongui-disabled-link
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Sergio Miller#molongui-disabled-link
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Sergio Miller#molongui-disabled-link
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Sergio Miller#molongui-disabled-link
Footnotes
- In total, ten Chinese credit institutions and four state-owned banks advised Russian clients of the suspension of settlements and increased checks.
- In February, payments did resume with the Russian Federation, but for a limited list of goods. Permitted categories include agricultural products, medicine, textiles, tourism and education.
- Roughly transacting $30 billion annually.