According to reports, Chinese banks have decreased their holdings in Russia due to ongoing sanctions in response to President Vladimir Putin's invasion of Ukraine, which has complicated trade relations between the two countries.

According to a report from the Russian business source Frank Media, Bank of China reduced its assets in Russia by 37 percent in the second quarter of 2024, reaching 355.9 billion rubles ($3.9 billion).

According to the outlet, Industrial and Commercial Bank of China reduced its assets by 27 percent to 462.4 billion rubles ($5.1 billion) due to worsening payment issues shown in their turnover sheet. Newsweek reached out to the banks for a response.

China Construction Bank and China Agricultural Bank both saw growth in their assets in Russia, with an increase of 27 percent and 9 percent, respectively. Frank Media reported that Chinese banks were inhibiting business expansion in Russia due to ongoing challenges with financial transactions between the two countries.

Russian lawyer Pavel Bazhanov, who assists Russian businesses in China and the surrounding area, stated to Newsweek that Chinese banks were increasing their adherence to regulations and declining to handle additional Russian payments.

He mentioned that at times Russian banks will inquire with Chinese banks in advance to confirm if payments can be processed for a specific client or transaction on behalf of their clients.

He added that it is still possible to conduct payments in Russia-China trade using Chinese banks and other methods, as long as they are not linked to any sanctioned individuals or products.

Putin has proudly talked about the increase in trade with Beijing, which has supported the Russian economy during Western sanctions. Trade between the two countries has reached an all-time high since the outbreak of the war in 2022.

Although Putin has talked about shifting away from the Western-dominated global financial system, Chinese banks are starting to be more cautious about engaging in business with Russia. They are actively working to steer clear of U.S. secondary sanctions and are also postponing or refusing payments from Russia.

Challenges with settlements arose in late 2023 following a decree from President Joe Biden that targeted Chinese institutions involved in trade related to Russia's military sector, potentially blocking their access to the U.S. financial system.

Chinese banks started declining payment requests for sanctioned Russian entities this year. In May, the Russian branch of the Bank of China halted the processing of yuan payments with Russian banks under U.S. sanctions, as did other major Chinese banks like the Industrial and Commercial Bank of China and China CITIC Bank.

Sanctions in June resulted in the suspension of foreign trade settlements in dollars and euros on the Moscow Exchange.

During August, Russian media reported that nearly all Chinese banks were declining transactions in yuan from Russia, according to traders. Merchants are required to utilize middlemen, leading to increased expenses from fees.

 Asked Questions

Trade Relations

• Q: What is happening to Chinese banks' holdings in Russia?
• A: Chinese banks have decreased their holdings in Russia due to ongoing sanctions in response to President Vladimir Putin's invasion of Ukraine, which has complicated trade relations between the two countries.

Bank Holdings

• Q: What changes did Bank of China and Industrial and Commercial Bank of China make to their assets in Russia?
• A: Bank of China reduced its assets in Russia by 37 percent, and Industrial and Commercial Bank of China reduced its assets by 27 percent due to worsening payment issues.

Business Expansion

• Q: Why are Chinese banks inhibiting business expansion in Russia?
•  A: Chinese banks are inhibiting business expansion in Russia due to ongoing challenges with financial transactions between the two countries, including payment issues and sanctions.

Payment Processing

• Q: Can Russian banks still conduct payments in Russia-China trade using Chinese banks?
• A: Yes, it is still possible to conduct payments in Russia-China trade using Chinese banks and other methods, as long as they are not linked to any sanctioned individuals or products.

Sanctions

• Q: Why are Chinese banks declining payment requests from Russia?
•  A: Chinese banks are declining payment requests from Russia to avoid U.S. secondary sanctions and to comply with regulations.

Settlements

• Q: What challenges arose in settlements between Russia and China?
•  A: Challenges with settlements arose in late 2023 following a decree from President Joe Biden that targeted Chinese institutions involved in trade related to Russia's military sector.

Currency

• Q: What is happening to yuan payments between Russian and Chinese banks?
•  A: Chinese banks have halted the processing of yuan payments with Russian banks under U.S. sanctions, and nearly all Chinese banks are declining transactions in yuan from Russia.

Middlemen

1. Q: How are merchants affected by the decline in transactions between Russian and Chinese banks?
2.  A: Merchants are required to utilize middlemen, leading to increased expenses from fees.

Conclusion

The ongoing sanctions against Russia have led to a significant reduction in Chinese banks' holdings and a cautious approach towards financial transactions with Russian entities, highlighting the complexities of trade relations between the two nations amidst geopolitical tensions. Despite some growth in specific banks' assets, the overall trend indicates a tightening of financial cooperation, driven by the need to avoid U.S. sanctions and regulatory compliance.