How to solve payment problems between Russia and China?
Last week, Reuters reported, citing Russian sources, that domestic companies are facing increasing difficulties in settling payments with trading partners in China. As a result, transactions worth tens of billions of yuan are being halted. According to the agency, the reason is that Chinese banks have begun to massively suspend or terminate operations with Russian companies. This is due to the fact that in June, the United States threatened China with tougher sanctions for cooperating with Russia, prompting Chinese banks to take a stricter stance to avoid repercussions.
As is known, in December 2023, U.S. President Joe Biden signed an executive order legalizing the possibility of imposing secondary sanctions against foreign banks if they assist in transactions with sanctioned persons or in supplies to the Russian defense industry. In addition, in mid-June, the U.S. expanded this mechanism. The number of sanctioned Russian entities, with which interaction could serve as a basis for American secondary sanctions, has multiplied.
Reuters claims that the cost of processing transactions between Russia and China has increased due to the need to establish intermediary systems. «Russian companies and officials have been pointing to delays in transactions for several months after Chinese banks tightened compliance following Western threats of secondary sanctions over ties with Russia. Sources say the problem has worsened this month,» Reuters reports.
The agency notes that some Russian companies are forced to use chains of intermediaries in third countries to process their payments, bypassing checks by Chinese banks. However, this leads to higher transaction processing costs. At the same time, these problems allegedly do not cause serious concern for the Russian leadership, as payments in priority areas are still going through.
In recent months, many Russian media outlets have reported on problems with payments to Chinese counterparts, citing numerous participants in foreign trade transactions.
Russian presidential spokesman Dmitry Peskov told Reuters that «with such volumes and in such a hostile environment, it is impossible to avoid some problematic situations». He added that China and Russia can constructively discuss and resolve issues thanks to «the true partnership spirit of our relations.»
After his visit to China in May, Russian President Vladimir Putin told journalists that there were indeed problems with the settlements between the countries, but that they could be solved. «Tertiary sanctions, or those against third countries involved in economic activities, are of course doubly or triply illegitimate, because if they are imposed without a UN Security Council decision, they are generally illegitimate. And against third countries, it completely defies common sense,» Putin noted.
But according to Reuters and Russian media, the problems are getting worse.
In fact, the first signs appeared early in the year when companies reported that payments to trusted partners in China through reliable Chinese banks were being held up. At the time, the situation was explained by the fact that in January, the director of the U.S. Treasury Department’s Financial Crimes Enforcement Network met in Hong Kong with the heads of local branches of Chinese and Western banks. As reported in the Chinese and foreign press, representatives of the Bank of China, the Industrial and Commercial Bank of China, and nearly a dozen other financial institutions in China agreed to cooperate with the U.S. in enforcing sanctions and reviewing operations to avoid secondary sanctions. A similar visit was recently made by a U.S. Assistant Secretary of Commerce to Hong Kong and Beijing. How many such visits have there been in the last six months? Is it turning out that sanctions are beginning to work even in the Chinese direction? Is our strategic partner abandoning us — ask the observers.
During the recent visit of the Chinese Prime Minister to Moscow, Russian Prime Minister Mikhail Mishustin and Chinese Prime Minister Li Qiang agreed to ensure the smooth operation of payment channels in trade between the two countries and to open new bank branches for this purpose. In fact, the opening of bank branches was not prohibited before. For example, the Bank of China has been operating in Russia for a long time. However, VTB managed to open a branch in China only recently. The Chinese bureaucracy worked in such a way that it was very difficult to overcome the formalities, or the requests of Russian companies went unanswered. Typical Chinese. This situation lasted for many years, the problem was talked about, but not solved. If there were Russian bank branches in China and Chinese ones in Russia, the problem of payments would not have arisen. After all, we are talking about settlements in national currencies that do not interfere with the dollar system controlled from Washington. There is also the issue of secondary sanctions, but it does not arise with respect to Russian entities that are already under sanctions.
It is hard to imagine that this issue was not discussed at the level of finance ministries and central banks — most likely these discussions were not successful. Negotiations at the level of prime ministers were necessary. If the communiqué adopted during the recent visit of Chinese State Councilor Li Qiang to Moscow is implemented, the problem will be solved. The other problem is that it will take time, how much time is unknown. On September 1, a law came into force in Russia that expands the opportunities for foreign banks from friendly countries to open branches in Russia.
There is also the possibility of barter trade. China does this with Iran, Malaysia and a few other countries. And trade with North Korea has never ceased, despite the de facto sanctions blockade of that country.
On the whole, the situation hurts both sides, especially small and medium-sized enterprises, as they lose profits, normal trade flows are disrupted, and the overall volume does not grow as planned by the leaders of both countries. As a result, sooner or later, leaders in China may find themselves in an unenviable position. After all, this is also an interstate problem for countries with strategic relations. It is not for nothing that the communiqué following the 29th meeting of the heads of government states: «The parties, in accordance with the decisions of the leaders of the two states, will continue to comprehensively deepen Russian-Chinese relations in trade, economic, investment, energy, financial, scientific, technical, humanitarian, and interregional spheres, make joint efforts to increase the resilience of practical cooperation, and take coordinated measures to achieve an even higher level of comprehensive mutually beneficial cooperation between the two countries.»
But numerous intergovernmental commissions, as well as finance ministries and central banks, must also play their part. Discussions about the introduction of digital currencies and digital payments have been going on for a long time. The digital yuan has been working in China for a long time, and we are experimenting with the digital ruble. Even the Americans would find it difficult to intercept digital payments. In the end, this is a problem of the agility of our bureaucracy and our financiers. After all, those in China who use the dollar in their transactions have no problems. We need to create a system where there are no problems with the ruble either. Because we are building a multipolar world and trying to move away from a dollar-based financial system.