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Bank of China halts cooperation with sanctioned Russian banks to avoid U.S. penalties

Bank of China halts cooperation with sanctioned Russian banks

The Russian branch of the Bank of China has suspended cooperation with banks in Russia that are under U.S. sanctions to avoid secondary American retaliatory measures. This move comes amidst increasing pressure from the United States on entities that continue to engage in business with Russian institutions subjected to sanctions. The suspension is a strategic decision aimed at mitigating the risks of secondary sanctions that could be imposed on Chinese financial institutions. These secondary sanctions would not only hinder the operations of the Bank of China but also affect its global standing and relationships with other international financial bodies. The Bank of China's decision underscores the intricate dynamics of international finance where geopolitical tensions can significantly influence banking operations.

This information was reported by the Russian newspaper "Kommersant," citing sources within the banking sector. "Kommersant," Russian business daily, has a history of providing in-depth analysis and reporting on economic and financial matters. The newspaper’s reliance on sources within the banking sector indicates the gravity and credibility of the report. By sourcing information directly from individuals familiar with the matter, "Kommersant" ensures that the news is accurate and reflective of the current situation. The use of anonymous sources, however, highlights the sensitive nature of the topic, as those involved may face repercussions for disclosing internal decisions and strategies.

Bank of China in Russia specializes in handling yuan payments between China and Russia. It is the second-largest branch of Chinese banks in Russia, with assets valued at $6.7 billion in the spring of 2024. This branch plays a pivotal role in facilitating bilateral trade between the two nations, which has seen significant growth in recent years. The bank’s specialization in yuan transactions aligns with China’s broader strategy to internationalize its currency and reduce dependency on the U.S. dollar. This move is particularly important in the context of U.S. sanctions, as it allows Russia and China to continue their trade relations without falling foul of Western financial systems. The substantial asset base of the Bank of China’s Russian branch further emphasizes its importance in the bilateral economic relationship.

Experts consulted by "Kommersant" believe that the decision by the Bank of China will increase the risk of banking fraud, as Chinese and Russian entities might attempt to bypass sanctions using non-transparent intermediaries. The suspension of cooperation with sanctioned Russian banks is likely to push transactions into less regulated and less transparent channels. This creates fertile ground for fraudulent activities, including money laundering and the use of shell companies to disguise the true nature of financial transactions. The reliance on non-transparent intermediaries also complicates regulatory oversight and increases the difficulty of tracking illicit financial flows. The experts' concerns highlight the broader implications of the Bank of China's decision on the integrity of the financial system in both countries.

"This is not good news for the Russian market," commented one of the newspaper's sources. "There will be additional trading costs, both in terms of time and the expenses of processing payments. The most serious issue will be that payments will move outside the banking sector, reducing the state's control over them," they added. The additional costs mentioned include higher fees for transactions and longer processing times, which could deter businesses from engaging in trade. The movement of payments outside the regulated banking sector poses significant challenges for regulatory authorities, as it diminishes their ability to monitor and control financial activities. This loss of control could lead to a rise in economic instability and uncertainty, further exacerbating the challenges faced by the Russian market.

Last week, Reuters reported that following Vladimir Putin's visit to China in May, an alternative channel for bilateral business operations was established, wherein payments would be made through small regional banks near the Russian-Chinese border. This development underscores the adaptability of both nations in finding ways to maintain their economic relationship despite external pressures. These regional banks, which operate under the radar of major international regulatory bodies, provide a temporary solution for continuing transactions. However, the use of these banks is not without risks. Their limited size and regional focus mean they may lack the necessary infrastructure and compliance mechanisms to handle large-scale international transactions. The reliance on these smaller banks also highlights the fragility of the existing financial arrangements and the constant need for innovation to circumvent sanctions.

However, Reuters notedthat this method of bypassing sanctions might only work for a short time, as the U.S. Treasury Department is already developing ways to impose restrictions on smaller banks that support Russian military forces. The proactive measures by the U.S. Treasury indicate a keen awareness of the evolving strategies employed by Russia and China to mitigate the impact of sanctions. The Treasury's efforts to extend sanctions to smaller banks reflect a comprehensive approach to curtailing financial support for Russian military activities. This ongoing cat-and-mouse game between the sanctioned entities and the sanctioning bodies illustrates the complexities of enforcing international economic restrictions. It also underscores the lengths to which nations will go to protect their economic interests and maintain strategic alliances.

Since the invasion of Ukraine, China has become Russia's most important economic partner. The Chinese yuan is now used to pay for more than one-third of all Russian exports, whereas before the war it was only 0.4% of payments. This dramatic increase in the use of the yuan signifies a major shift in the global economic landscape. The growing reliance on the yuan for trade with Russia reflects China's expanding influence in international markets and its efforts to promote the yuan as a global currency. This shift also indicates a strategic realignment of Russia’s economic priorities in response to Western sanctions. By deepening its economic ties with China, Russia aims to secure a stable and reliable trading partner capable of providing essential goods and services.

Less than two weeks before the Bank of China's decision, the U.S. announced a wide range of additional sanctions targeting Russia's "war economy," which increase the risk of secondary sanctions for entities doing business with Russian banks, the defense industry, and other key economic sectors. These new sanctions are part of a broader strategy to weaken Russia’s economic capacity to sustain its military operations. The focus on secondary sanctions serves as a deterrent to foreign entities considering business with Russia, signaling that indirect support will also have consequences. The comprehensive nature of these sanctions reflects the determination of the U.S. to isolate Russia economically and diminish its ability to finance the war in Ukraine.

These sanctions also impacted China, which plays a major role in circumventing existing restrictions. The sanctions were extended to the largest Russian state banks, including Sberbank, Vnesheconombank, and VTB, covering their significant transactions, including with their branches in China and India. The extension of sanctions to cover transactions with Chinese and Indian branches of Russian banks illustrates the interconnected nature of global finance and the challenges of enforcing sanctions. This move also highlights the strategic importance of China and India in the global economic system and their potential roles in mitigating the impact of Western sanctions on Russia. The involvement of these major economies underscores the global implications of the conflict in Ukraine and the widespread efforts to curtail Russia’s economic capabilities.

White House National Security Advisor Jake Sullivan stated that the new sanctions are a signal to Beijing and other countries supporting Russia's war machine that they too are now at serious risk of being subjected to the sanctions regime. Sullivan's statement reflects the broader geopolitical strategy of the U.S. to use economic tools as a means of influencing international behavior. By extending the threat of sanctions to countries supporting Russia, the U.S. aims to create a more unified and effective international response to the conflict. This approach also seeks to increase the economic and political costs for nations that choose to align with Russia, thereby isolating it further on the global stage.

Bank of China is one of the largest and oldest banks in China, as well as one of the largest banks in the world. It was established in 1912 and is one of the four major state-owned banks in China, alongside the Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), and Agricultural Bank of China (ABC). Its headquarters is located in Beijing. The bank operates both domestically and internationally, offering a wide range of financial services, including retail banking, corporate banking, investment banking, insurance services, and asset management. The extensive history and scale of the Bank of China underscore its critical role in both the Chinese and global financial systems. As a key player in international finance, the Bank of China’s decisions and strategies have far-reaching implications for global economic stability and growth.

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