Chinese Bank Deals New Blow to Putin's Wartime Economy

The main Chinese bank used by Russian importers has stopped operations in Russia, a move that an expert told Newsweek shows how much firms in China fear breaking U.S.-led sanctions.

The decision by Zhejiang Chouzhou Commercial Bank follows Vladimir Putin's boasts about booming trade between Russia and China, which he had hoped would offset the loss in western markets due to U.S.-led measures to cut off funding for its war in Ukraine.

Trade between Russia and China may have hit $218.2 billion between January and November 2023, achieving a goal set by the countries in 2019 a year ahead of schedule, but it appears that Chinese institutions are getting cold feet in their dealings with Russia.

Chouzhou Commercial Bank, the leading settlement bank for Russian importers working with China, has notified clients it was suspending operations with Russia and its ally Belarus, Russian business newspaper Vedomosti reported.

A businessman from the Russian city of Izhevsk who buys equipment for machine tools in China told the paper that the bank informed him in December about goods that were prohibited under Western sanctions. A few weeks later, the bank said all settlements with Russia would stop, regardless of the product or currency used.

"Chinese banks strive to comply with U.S. sanctions, therefore, to reduce their own risks, settlements in U.S. dollars in trade with Russia have practically ceased and have been replaced by Chinese yuan settlements," Pavel Bazhanov, a Russian lawyer who provides legal support for Russian businesses in China and the wider region, told Newsweek.

But he said that President Joe Biden's executive Order 14114 issued on December 22, 2023, "creates a new risk of secondary sanctions" for Chinese financial institutions.

Treasury Secretary Janet Yellen said the Office of Foreign Assets Control (OFAC) sanctions institutions involved in trade supporting Russia's military-industrial base, which could see them denied access to the U.S. financial system.

Some big Chinese banks still handle Chinese yuan payments between Chinese and Russian entrepreneurs, but "usually their compliance is more time-consuming and careful," Bazhanov said.

"The suspension of operations is due to the fact that Chinese banks need to assess the new risks and update their compliance requirements," he said.

While Biden's executive order does not restrict usual trade which is not related to Russia's military industrial complex, Bazhanov said "some Chinese banks may consider theirs risks unacceptably high, or compliance too complicated or costly."

The suspension of the payments occurs during the Chinese New Year holidays, when all business activity is greatly reduced, so the impact would not be too high right now. "The real consequences will be clear later," he said.

Some Chinese banks will still handle yuan transactions related to trade with Russia, which require more paperwork but "some payment options are still available," he added.

Last month, Bloomberg reported that at least two of China's state-owned banks were tightening curbs on funding to Russian clients for fear of secondary sanctions from the U.S.

Sources told the outlet that the banks would stop providing financial services to the Russian military sector and review companies doing business in Russia or sending critical goods to Russia through a third country.

Kremlin spokesman Dmitry Peskov said on Wednesday that Russian authorities are having a "close dialogue with our Chinese friends and, of course, we will solve all the problems that arise," per AFP.

Russian firms have become more dependent on Chinese institutions and the yuan since some Russian banks withdrew from the SWIFT global financial-messaging system.

But Vedomosti reported information on money flows between China and Russia is available to Western regulators even if conducted through payment systems other than SWIFT like China's Cross-Border Interbank Payment System (CIPS).

"Because Biden didn't get his package approved by Congress on Ukraine, the only way out is to press more on the sanctions," Alicia Garcia-Herrero, chief economist for Asia-Pacific at French investment bank Natixis, told Newsweek.

This will lead to "more wariness" from Chinese institutions to trade with Russia. "We will see a deceleration in trade between Russia and China anyway," which will become more marked because of Biden's executive order.

"But you will see an increase in exports from China to Russia through North Korea," she added.