MOSCOW (Reuters) – Some Russian companies are facing growing delays and rising costs on payments with trading partners in China, leaving transactions worth tens of billions of yuan in limbo, Russian sources with direct knowledge of the issue told Reuters.
Russian companies and officials for a few months have pointed to delays in transactions after Chinese banks tightened compliance following Western threats of secondary sanctions for dealing with Russia. The sources said the problem has intensified this month.
Chinese state banks are shutting down transactions with Russia “en masse” and billions of yuan worth of payments are held up, a source close to the government, who spoke on condition of anonymity, told Reuters.
China is Russia’s largest trading partner, accounting for a third of Russia’s foreign trade last year and supplying items such as vital industrial equipment and consumer goods that help Russia weather Western sanctions. It also provides a lucrative market for many Russian exports that China relies on, from oil and gas to agricultural products.
After the U.S. Treasury in June threatened secondary sanctions on banks in China and other countries for dealing with Russia, Chinese banks started to take a very strict stance on transactions, said a source at one of Russia’s leading e-commerce platforms. It sells a wide variety of consumer goods imported from China.
“At that moment, all cross-border payments to China stopped. We found solutions, but it took about three weeks, which is a very long time, trade volumes fell drastically during that time,” said the source.
One working solution was to buy gold, move it to Hong Kong and sell it there, depositing cash in a local bank account, the person said.
Sources told Reuters that some Russian businesses have been using chains of intermediaries in third countries to handle their transactions and get around compliance checks run by Chinese banks. As a result, costs to process transactions have risen to as much as 6% of transaction payments, from close to zero before, they said.
The sources spoke on condition of anonymity because of the sensitivity of the matter.
“For many small companies, this means a complete shutdown,” another source close to the government said.
The Kremlin acknowledged the problem but said that economic cooperation is important for both countries and that solutions will be found.
“With such volumes and in such an unfriendly environment, it is impossible to avoid some problematic situations,” Kremlin spokesman Dmitry Peskov said in a statement to Reuters.
“However, the truly partnership spirit of our relations allows us to discuss and resolve current issues constructively,” he said.
Transactions with China are not of grave concern to top Russian leadership, however, because payments in priority areas are still proceeding smoothly, and there is political will from both sides, a banking source told Reuters. Bilateral arrangements for large companies, such as Russia’s commodity exporters and China’s exporters of vital technologies, still work well, whereas smaller companies trading in consumer goods experience problems, sources said.
Russian exporters haven’t experienced difficulties in receiving payments for commodities that China imports, such as oil or grain, another source close to the Russian government told Reuters.
Bilateral trade between Russia and China grew by 1.6% to $137 billion in the first half of 2024, according to China’s official customs data, after hitting a record high $240 billion in 2023.
“Normal trade between China and Russia is consistent with WTO rules and market principles, is not directed against third parties and is not subject to interference or coercion by third parties,” a Chinese foreign ministry spokesman told Reuters.
“We firmly oppose any illegal unilateral sanctions and “long-arm jurisdiction” and will take all necessary measures to safeguard our legitimate rights and interests,” the spokesman added.
Russia’s imports from China fell by more than 1% to $62 billion in January-July 2024 due to payment problems, according to China’s official statistics.
Russia’s central bank forecasts the country’s total imports from around the world will fall by as much as 3% this year.
“Imports will decrease in 2024 due to the strengthening of sanctions barriers related to payments and logistics,” the central bank said, although it predicted that the situation would improve in the medium term, according to draft monetary policy guidelines published on Aug. 29.After Russian President Vladimir Putin’s visit to China in May, some local Chinese banks without a global business stepped in to handle bilateral payments. They would be out of the reach of Western sanctions enforcers.
However, sources pointed out that these banks often had outdated IT systems and lacked staff with the necessary skills.
The banking source said that cross-border couriers were shuttling transfer papers across the Russia-China border to get them physically stamped and signed by Chinese bankers.
“Until issues with payments are resolved at the state level, we cannot expect a dynamic inflow of investments from China,” said Kirill Babaev, head of the China Institute at the Russian Academy of Sciences.
Research co-authored by Babaev and released this month highlights the risks posed to Russia’s industrial sector where China has become a leading supplier.
“In today’s situation, payment problems with Chinese banks particularly exacerbate this challenge, as there are no other major suppliers of many types of industrial equipment besides China at present,” the research paper said.
Large companies in China as well as India are heavily dependent on American and European markets, Dmitry Birichevski, head of the economic department at Russia’s foreign ministry, said at a conference in Moscow on Aug. 16.
“And they are being told, ‘Guys, if you continue to work with Russia, we will cut off your access to our market and choke off your oxygen supply’,” he said.
This post is originally published on INVESTING.
