Finance: Chinese banks, now more cautious towards Moscow

Finance: Chinese banks, now more cautious towards Moscow
Finance: Chinese banks, now more cautious towards Moscow

Frightened by threats of US sanctions, Chinese banks have in recent months become more cautious in their transactions with Russia, despite the “unlimited” friendship proclaimed by the leaders of the two countries.

The diplomatic and commercial relationship between Beijing and Moscow has clearly strengthened with the war in Ukraine. Ignoring criticism from the international community, Chinese President Xi Jinping is expected to receive his Russian counterpart Vladimir Putin in Beijing in May. But on the financial level, things are complicated: an executive order signed in December by President Joe Biden now authorizes secondary sanctions against foreign banks connected to the Russian war machine. In short, this means that the US Treasury can exclude them from the global financial system, based on the dollar. Since then, several Chinese banks have halted or reduced their transactions with their Russian clients.

“Currently, it’s hard to bring in money from Russia,” says a Chinese working in clothing wholesale, sitting in front of his store in central Beijing. “The banks are not saying why… but it is undoubtedly due to the threat (of sanctions) from the United States,” he adds. Traders say banks are imposing additional controls on transactions between the two countries, to prevent any risk of sanctions. This sometimes takes months, weakening the liquidity of small import-export companies.

Beijing wants to avoid risks for its economy
Trade between China and Russia has increased since the start of the war in Ukraine, exceeding 220 billion euros in 2023, according to Chinese customs, an increase of more than 25% over one year. So if Chinese banks refuse Russian payments, the effects on Moscow could be serious. China massively imports gas and oil from its neighbor – “nearly 50%” of Russian crude, according to the Kremlin. Russia is particularly recovering the electronic components it needs in both the civilian and military sectors. The payment difficulties also coincided with a drop in Chinese exports to Russia in March and April.

“Even though the sanctions were imposed to (prevent) exports of certain products from China, they have an impact on the rest of trade,” notes Pavel Bazhanov, a lawyer working for Russian companies in China.

The difficulties of Russian companies with Chinese banks were mentioned by the Russian media and Kremlin spokesperson Dmitry Peskov castigated “unprecedented pressure” from the United States. Beijing does not publicly confirm the problem, but the Chinese Foreign Ministry says it opposes “unilateral and illegal US sanctions”. Behind the scenes, Chinese banks are careful not to become collateral victims, analysts note.

“Determining whether payments are linked to the Russian military-industrial complex represents a considerable challenge for Chinese companies and banks,” observes Alexander Gabuev, director of the Carnegie Russia Eurasia Center in Berlin.

“They apply the precautionary principle, which reduces the volume of transactions.” And in a context of slowing Chinese growth, Beijing wants to avoid any additional risk for its economy, estimates William Pomeranz, expert at the think tank The Wilson Center.

Turn west?
Other experts also suggest that by doing so, China is seeking to manage its relationship with Washington, in the middle of a presidential year, when ties seem to be stabilizing, after years of friction. Chinese authorities may have asked banks to scrutinize any Russian payments so as not to create “a point of contention in the American election,” says Wang Yiwei, director of the Institute of International Relations at the Chinese University of China. Renmin.

“China would not be stupid enough” to let one of its big banks finance the Russian war effort, assures Shen Dingli, an international relations specialist based in Shanghai. It “is not going to give the United States the ability to fully impose sanctions.” A possible solution could be to achieve what many countries wanting to escape American sanctions dream of: financial systems independent of the dollar. Moscow’s shift towards Asia, with the war, made it possible to “refine a system of cross-border payments in national currencies (yuan and ruble)”, explains Alexandra Prokopenko, former advisor to the Central Bank of Russia.

This system allows banks to bypass traditional financial infrastructures such as SWIFT, protecting them from sanctions. Current payment problems show that this approach is “not a panacea,” warns the expert. But “Moscow and Beijing are fully capable of adapting processes to a constantly changing environment.”

Sami Nemli With Agency / ECO Inspirations

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