AFP: US sanctions is testing China’s unlimited friendship with Russia

Chinese banks have in recent months become more cautious in doing business with Russia for fear of tough new US sanctions over the war in Ukraine, a test of the borderless friendship between the two countries.

Trade between China and Russia has hit record levels in recent years, causing China to be accused of helping to revive Moscow’s economy, while President Vladimir Putin is due to visit Beijing in May.

But Washington’s recent vow to go after financial institutions helping Moscow finance its war in Ukraine has tested the toughness of the relationship between Beijing and Moscow and made Chinese banks fear isolation.

An executive order issued by President Joe Biden in December allows secondary sanctions to be imposed on foreign banks that deal with the Russian war machine, allowing the US Treasury Department to exclude them from the dollar-dominated global financial system.

Since then, many Chinese banks have suspended or slowed down dealings with Russian customers, according to eight people from both countries.

A Chinese wholesaler said in front of his shop in a major mall in central Beijing this week, “At the moment, it’s difficult to get money from Russia”.

As a group of Russian tourists strolled through shelves displaying electronics, leather bags and other goods, he said, “Banks don’t give a reason, but it may be due to the threat of sanctions from America”.

Traders say banks impose additional controls on cross-border payments to avoid penalties, a process that can take months and has led to increased costs, sparking cash flow crises in small import-export companies.

Another trader told AFP on condition of anonymity that they had to halt their operations in China and return to Russia because they can’t get any money from customers.

The traders declined to give their names because of the sensitivity of the trade relationship between Beijing and Moscow.

This coincides with a decline in Chinese exports to Russia in March and April compared to the rise seen at the beginning of the year.

Pavel Bazanov, a lawyer working for Russian companies in China, told AFP, “Although the imposition of sanctions was aimed at hindering the export of some goods from China, they had some impact on normal trade”.

Trade between China and Russia has boomed since the invasion of Ukraine and reached $240 billion in 2023, according to figures from the Beijing Customs Administration.

However, reports said that Russian companies are struggling to settle payments with Chinese banks began to circulate in Russian media earlier this year.

The Kremlin acknowledged the problem in February, and its spokesman Dmitry Peskov later criticized the unprecedented US pressure on China.

Beijing has not acknowledged its existence, but its foreign ministry told AFP it opposes unilateral and illegal US sanctions.

But behind the scenes, Chinese banks are working to ensure they don’t become the target of sanctions, analysts say.

Alexander Gabov, director of the Carnegie Russia and Eurasia Center in Berlin, said, “Knowing if the payments are related to the Russian military-industrial complex is a major challenge for Chinese companies and banks”.

“It works according to the principle of + precaution is better than regret + which reduces the volume of transactions,” he told AFP.

Chinese President Xi Jinping and his counterpart Vladimir Putin have spoken frequently about the unlimited friendship between their countries, while the Russian president announced at a business forum last month that he will visit China in May.

William Pomerans of the Wilson Center said slowing domestic growth in China had given incentives to Beijing not to cause further damage to its economy.

Other experts said the new measures for Chinese banks reflected Beijing’s desire to patch up its relationship with the United States ahead of this year’s election.

Relations between the world’s two largest economies have stabilized in recent months after years of disagreements over trade, technology and other areas.

Wang Yiwei, head of the Institute of International Affairs at China’s Renmin University, said Chinese officials may have directed banks to slow down Russian financial transactions to make sure they don’t raise a divisive issue affecting the US election.

International relations researcher Shen Dingli said “China wouldn’t be stupid to the point of allowing a major bank to finance Russia’s war… The United States won’t be given the option of full sanctions”.

Experts said part of the solution could be a move promoted by countries keen to be immune to US sanctions, which are independent of the US dollar.

Alexandra Probopenko, a former adviser at Russia’s central bank, told AFP that Russia’s wartime turns towards Asia showed the proper functioning of a system of cross-border transactions in the two national currencies, yuan and ruble”.

She added that the system allows banks to bypass traditional financial systems such as SWIFT, protecting them from the impact of sanctions.

“The current glitches in these payment mechanisms show that this approach isn’t the solution,” she said, adding, “But Moscow and Beijing know very well how to adapt operations to an ever-changing environment”.