Rising delays and costs are exacerbating payment issues.
Some Russian companies are facing increasing payment issues, resulting in delays and rising costs for transactions with their Chinese trading partners. Transactions totaling tens of billions of yuan remain unresolved, according to sources familiar with the matter who spoke to Reuters.
Impact of Increased Compliance on Payment Issues
Recently, Russian companies and officials have highlighted payment issues following heightened compliance measures by Chinese banks. These banks have tightened regulations due to Western threats of secondary sanctions against entities dealing with Russia. As a result, the problem has intensified this month.
Shutdown of Transactions and Payment Bottlenecks
Chinese state banks are reportedly shutting down transactions with Russia en masse, leading to significant delays and holding up billions of yuan worth of payments, according to a source close to the government who spoke on condition of anonymity. Consequently, this has created substantial disruptions in trade.
Importance of China-Russia Trade
China remains Russia’s largest trading partner, accounting for a third of Russia’s foreign trade last year. China supplies crucial industrial equipment and consumer goods, helping Russia mitigate Western sanctions. Additionally, China is a key market for Russian exports such as oil, gas, and agricultural products.
Response to Sanctions Threats
After the U.S. Treasury threatened secondary sanctions on Chinese and other banks for dealing with Russia in June, Chinese banks began adopting a stricter stance on transactions. This shift led to a temporary halt in cross-border payments to China, causing a significant drop in trade volumes, as noted by a source at a leading Russian e-commerce platform.
Workarounds and Rising Costs
In response, some Russian businesses have resorted to using chains of intermediaries in third countries to navigate compliance checks by Chinese banks. This workaround has increased transaction processing costs to as much as 6%, compared to near-zero costs previously.
Government and Industry Reactions
The Kremlin has acknowledged the issue but emphasized the importance of economic cooperation between Russia and China. Kremlin spokesman Dmitry Peskov stated that, despite problematic situations, the partnership’s spirit allows for constructive discussions and resolution of issues. Notably, payments in priority areas continue to proceed smoothly, reflecting political will from both sides.
Bilateral Trade and Import Statistics
Despite payment problems, bilateral trade between Russia and China grew by 1.6% to $137 billion in the first half of 2024, following a record high of $240 billion in 2023. However, Russia’s imports from China declined by over 1% to $62 billion from January to July 2024, attributed to payment issues. The central bank forecasts a potential 3% drop in total imports for the year due to sanctions and logistics barriers.
Efforts to Mitigate Payment Issues
Following President Vladimir Putin’s visit to China in May, some smaller Chinese banks, which are not globally active, began handling bilateral payments. However, these banks often face challenges with outdated IT systems and insufficient staff. Meanwhile, cross-border couriers are shuttling transfer papers to ensure physical stamping and signing by Chinese bankers.
Future Outlook and Expert Opinions on Payment Issues
Until payment issues are resolved at the state level, significant inflows of investments from China are unlikely. Kirill Babaev of the China Institute at the Russian Academy of Sciences highlighted that payment problems exacerbate challenges in Russia’s industrial sector, which relies heavily on Chinese suppliers. Dmitry Birichevski from Russia’s foreign ministry added that major companies in China and India are threatened with market exclusion if they continue to work with Russia.