Chinese banks 'refrained' from dealing with Russia over sanctions fears

China and Russia are in "close dialogue" over international payments processing after a Chinese bank was reported to have stopped transactions with Russia for fear it would be sanctioned.

Russian deputy foreign minister Andrey Rudenko said problems regarding payments between China and Russia "will be solved", Russian news agency Tass reported on Friday.

Rudenko said a number of Chinese banks had "refrained from banking activities" with Russia due to "fears of sanctions" but he did not think China would limit transactions through the Financial Messaging System, the Russian equivalent of the Swift transfer system.

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When asked to comment on reports of problems with payments between the two countries, including transactions through the Financial Messaging System, he told reporters: "No, we don't have such an issue. A couple of Chinese banks refrain so far as precaution, over fears [of being] sanctioned. But we are confident that this problem will be solved."

Trade between the two countries is expanding successfully, he added. "And this is the first demonstration of the fact that we solve such problems," he said.

"We have a close dialogue with our Chinese friends and, of course, we will solve all the problems that arise," Kremlin spokesman Dmitry Peskov told reporters in a briefing call on Wednesday.

Russia's Vedomosti business daily reported last week that Zhejiang Chouzhou Commercial Bank had informed clients that it had suspended all transactions with Russia and Belarus.

Chouzhou Commercial Bank is based in the eastern Chinese city of Yiwu, the world's largest wholesale market of small commodities, and has been one of the main banks for Russian exporters, according to Vedomosti.

Trade with China and the Chinese yuan have become an economic lifeline for Russia since it was expelled from the Swift financial messaging system in February 2022 following its invasion of Ukraine.

According to Russian Central Bank chief Elvira Nabiullina, a third of all Russian exports are now settled in renminbi.

Some of China's major financial institutions have already announced plans to restrict ties with Russia since the invasion of Ukraine.

Bank of China, Industrial and Commercial Bank of China and two Chinese-led development institutions - the New Development Bank and the Asian Infrastructure Investment Bank - have all reportedly restricted Russia's access to their financing.

UnionPay, a Chinese payment system once a lifeline for Russians after the exit of Visa and MasterCard in March 2022, has cut its exposure to sanctioned banks in Russia.

However, some smaller Chinese banks with no other international business ties, have been willing to finance Russia and assist in service payments.

But the role of Chinese financial institutions - especially smaller banks with no ties to places such as the US or European Union - as the main channels for Russia's overseas activities is being tested following the introduction of further US sanctions last month.

The restrictions mean banks run the risk of secondary sanctions and being cut off from investors in the West if they do business with sanctioned Russian entities.

At least two state-owned Chinese banks have ordered a review of their Russian businesses, Bloomberg reported last month without naming the institutions.

Beijing has not condemned Russia's actions in Ukraine and repeatedly said it will not join what it calls illegal and unilateral Western sanctions on Russia, but it has also said it will not deliberately circumvent sanctions.

China and Russia have grown increasingly close both politically and economically in recent years.

China-Russia trade reached US$240.1 billion in 2023, up 26.3 per cent from a year earlier, with Russia serving as a major provider of oil, gas, coal and agriculture commodities, according to official Chinese customs data.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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