Chinese state banks have halted transactions with Russia over fears of getting entangled in US sanctions, but smaller financial institutions are taking their place, Reuters reported on Friday.

Some smaller local Chinese banks are still processing payments with Russia because they do not have global businesses to worry about.

However, they lack the necessary IT systems and staff to handle cross-border transactions and even need to send hard copies of documents to and from Russia to get them stamped and signed, an anonymous banking source told the news agency.

China is a vital trading partner of heavily-sanctioned Russia. Trade between China and Russia surged to a record high of $240 billion in 2023, so keeping payments flowing is important for both sides.

Despite the difficulties, Russia — a major commodity exporter — is still receiving payments for its raw materials exports, such as oil and grains, another banking source told Reuters. Its payments for China’s key technologies exports are also still getting through.

However, small Russian companies — like those in the consumer goods trade — are not so fortunate. Big Chinese state banks are cutting off transactions with Russia “en masse,” and billions of yuan in transactions are in limbo — hitting small firms hard, anonymous sources close to the government told Reuters.

The Kremlin has acknowledged the issues with trade payments and said it’s working with China on solutions.

Reuters’ story followed recent news from Russian media about hurdles that local companies were having with Chinese banks.

Since the invasion of Ukraine, Russia and its trade partners have been getting around sanctions by using smaller banks and other payment modes or non-US-dollar currencies to circumvent the West’s ban of some Russian banks from the widely-used SWIFT messaging system.

But banks dealing with Russia have been winding their business with the country since December, when the US approved secondary sanctions targeting financial institutions that were helping Russia.

Moscow is now rushing to set up alternative payment systems, including crypto, to facilitate trade.

Russia and China were even planning to revive the age-old practice of barter trade to get around Western sanctions, Reuters reported last month.

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