Chinese companies selling to Russia have a big problem: banks / Solutions are “underground” and very risky

A southern Chinese appliance maker is having trouble selling its products in Russia, but not because of problems with its appliances, but because major Chinese banks are strangling payments for such transactions due to concerns about US sanctions.

To get money for its electronics products, the Guangdong-based company is considering using currency brokers working along China’s border with Russia, said the company’s founder, Wang, who asked not to be identified only by last name, according to Reuters.

The United States has imposed a series of sanctions on Russia and Russian entities since the country invaded Ukraine in 2022.

Now, it is threatening to extend them to banks in China – a country Washington accuses of “fueling” Moscow’s war effort, which is even crippling financial flows for China-Russia trade unrelated to military goods.

Some resort to “underground” financial solutions

This is a growing problem for small Chinese exporters, seven trade and banking sources familiar with the situation told Reuters.

As China’s big banks pull back from handling Russia-related transactions, some Chinese companies are turning to small border banks and underground financing channels such as foreign exchange brokers or even cryptocurrencies, which are banned in China, the sources explained .

Other companies have withdrawn from the Russian market altogether.

“You just can’t do business properly using official channels,” Wang said, because big banks now take months instead of days to settle payments from Russia, forcing him to turn to unorthodox payment or restrict their businesses.

Banks fear US sanctions

A manager at a large state-owned bank he previously used told Wang that the credit institution was concerned about possible U.S. sanctions over its dealings with Russia, Wang said.

A banker at one of China’s big four state-owned banks said it had tightened controls on Russia-related businesses to avoid the risk of sanctions.

“The main reason is to avoid unnecessary problems,” explained the banker, who asked not to be named.

Since last month, Chinese banks have stepped up scrutiny of Russia-related transactions or shut down business entirely to avoid being targeted by US sanctions, the sources said.

Big risks

“Transactions between China and Russia will increasingly go through underground channels,” said the head of a trade body in a southeastern province that represents Chinese businesses with interests in Russia.

“But these methods carry significant risks,” he added.

Making payments in cryptocurrencies, banned in China from 2021, may be the only option, a Moscow-based Russian banker said, because “it’s impossible to get past the KYC (know-your-customer) procedure at Chinese banks, big or small”.

China’s foreign ministry is not aware of the practices described by businessmen to arrange payments or problems with settling payments through major Chinese banks, a spokesman said, adding questions should be directed to “relevant authorities”.

The People’s Bank of China and the National Financial Regulatory Administration, the country’s banking regulator, did not respond to Reuters requests for comment.

Blinken went to China to express ‘concern’

US Secretary of State Antony Blinken, after meeting with top Chinese diplomat Wang Yi for five-and-a-half hours in Beijing on Friday, said he expressed his “serious concern” that Beijing is “fueling the country’s brutal war of aggression Russia against Ukraine”.

However, his visit, which also included a meeting with President Xi Jinping, was the latest in a series of moves to ease tensions that pushed relations between the world’s biggest economies to historic lows last year.

Although U.S. officials have warned that the United States is prepared to take action against Chinese financial institutions that facilitate trade in dual-use goods, civilian and military, and the U.S. has tentatively discussed sanctions against some Chinese banks, a U.S. official last week told Reuters that Washington does not yet have a plan to implement such measures.

The Chinese Foreign Ministry spokesman emphasized that his country “does not accept any illegal, unilateral sanctions. Normal trade cooperation between China and Russia cannot be interrupted by any third party.”

If the Chinese don’t solve the problem, we will, say the Americans

A State Department spokesman, asked about Reuters’ findings that Chinese banks have restricted payments from Russia and the impact on some Chinese companies, said: “Feeding Russia’s defense industrial base not only threatens the security of Ukraine, but threatens and European security.

“Beijing cannot achieve better relations with Europe while supporting the biggest threat to European security since the end of the Cold War,” the spokesman said.

Blinken made it clear to Chinese officials “that ensuring transatlantic security is a core US interest. “If China doesn’t solve this problem, the United States will,” the spokesman added.

Chinese banks have stopped settlements in Russia since March

Almost all major Chinese banks have suspended settlements from Russia since early March, an executive at a listed Guangdong electronics company said.

Some rural banks in northeastern China along the border with Russia can still process payments, but this has led to a gridlock, with some businessmen saying they waited months to open accounts.

A chemical and machinery company in Jiangsu Province has been waiting for three months to open an account at the Jilin Hunchun Rural Commercial Bank in the country’s northeastern Jilin Province, said Liu, who works at the company and who also requested , to be identified by the family name.

The BOC has blocked a payment from Liu’s Russian clients since February, and a bank loan officer said firms that export heavy equipment face tighter checks on receiving payments, Liu said.

“We gave up on the Russian market”

The executive from the Guangdong-listed company said their firm had opened accounts with seven banks since last month, but none had agreed to accept payments from Russia.

“We gave up on the Russian market,” said the manager.

“Finally, we stopped receiving more than 10 million yuan ($1.4 million) in payments from the Russian side and simply gave up. The payment collection process is extremely annoying.”

Wang may also change his mind about his business in Russia.

“I may gradually reduce my business in Russia because the slow procedure of collecting money is not good for the company’s liquidity management. Besides, you don’t know what will happen in the future. The channel may close completely one day,” he added.

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