Russian traders have become further frustrated in recent weeks, as even local Chinese lenders have stopped processing transactions to avoid U.S. sanctions over President Vladimir Putin‘s invasion of Ukraine.
As many as 98 percent of Chinese banks are rejecting direct Chinese yuan payments from Russia, the Russian newspaper Izvestia reported Monday, citing business representatives.
Since January, an increasing number of large financial institutions, such as China CITIC Bank and the Bank of China, have been jumping ship on yuan-denominated transactions with Russia. Chinese regional banks, previously believed to be a safer bet for cross-border transactions because of the lower exposure to international markets, have now followed suit.
Isolation from international financial markets has driven Russia to rely on the yuan for much of its trade transactions with China.
The development comes as the Biden administration ramps up efforts to broaden its sanctions net and target local Chinese banks conducting less due diligence on transactions with sectors that aid Russia’s war machine.
Frederic J. Brown/AFP via Getty Images
Alexi Poroshin, the CEO of First Group JSC, told Izvestia that in mid-July, major Chinese banks further ramped up scrutiny of inflows of yuan, separating them into two categories—”clean” and “dirty,” such as those originating in Russia.
Poroshin added that there are still work-arounds for Russians. He said there has been a severalfold increase in applications for the services of agents who transfer money to China through a third country.
There are also financial institutions in Hong Kong that continue to conduct settlements with Russian firms, he added—though he acknowledged that even in Hong Kong, Chinese firms are starting to eschew these payments.
Cryptocurrency is another option, as is sending money though Russian credit institutions with a presence in China, although the latter comes with a 5 percent markup on top of the Chinese central bank’s rate.
Russia’s sanction-strapped economy has been sustained in large part by trade with China, in particular its hunger for oil and natural gas. Trade turnover between the neighbors jumped to a record high of $240 billion in 2023.
However, Chinese outbound trade with Russia has been volatile since the beginning of the year as the payment issues take their toll.
Shipments fell in March and April before ticking upward again in May. In July, Chinese yuan-denominated exports to Russia fell by 3 percent in U.S.-dollar terms, according to customs data, after briefly ticking upward from 0.92 percent in May to 4.76 percent in June following Putin’s visit to Beijing.
These official trade figures are only part of the story, as many of China’s exports are being routed through friendly countries, particularly in Central Asia, analysts say.
The Russian Foreign Ministry and U.S. Treasury did not immediately respond to written requests for comment.
The Atlantic Council, a U.S. think tank, highlighted U.N. Comtrade data that showed Chinese vehicle-related exports to Kyrgyzstan more than doubled from 2021 to 2023.
“Many Chinese vehicle-related exports notionally bound for Central Asia are in fact headed to Russia,” the Atlantic Council reported, adding that some of the vehicles have dual military-civilian potential, such as excavators and equipment to maintain Russia’s truck fleet.
