China's Big Banks Halt Russia Transactions Over US Sanctions, Forcing Firms To Resort To 'Underground' Channels: Report

China’s major banks are reportedly halting transactions related to Russia, due to concerns over U.S. sanctions. This has led to a surge in the use of alternative channels for payments, including cryptocurrency, by Chinese companies conducting business with Russia.

What Happened: The Agricultural Bank of China Ltd, Bank of China Ltd, and China Construction Bank Corp are among the banks that have significantly reduced their financing of Russia-related transactions. Reuters reported citing sources that this has caused a significant problem for small Chinese exporters.

As a result, some Chinese companies are turning to smaller banks on the border and alternative financing channels, including cryptocurrency, despite its ban in China since 2021. Others have chosen to withdraw from the Russian market entirely.

“You simply cannot do business properly using the official channels,” a Guangdong-based company’s founder, Wang, who asked to be identified only by his family name.

According to the report, the U.S. has imposed a series of sanctions on Russia and Russian entities since the country’s invasion of Ukraine in 2022.

The threat of extending these sanctions to Chinese banks, which the U.S. accuses of supporting Moscow’s war effort, has led to a reduction in financial support for non-military trade from China to Russia.

The leader of a trade association in a southeastern Chinese province, representing Chinese enterprises engaged with Russian affairs, mentioned that transactions between China and Russia will likely shift towards clandestine routes.

He emphasized the inherent risks associated with such methods. According to a Russian banker based in Moscow, resorting to cryptocurrency for payments might become the sole viable choice, considering the impossibility of passing through KYC procedures at Chinese banks, irrespective of their size, following the ban imposed in 2021.

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Why It Matters: The U.S. has been increasingly vocal about China’s role in supporting Russia amid its war in Ukraine. This has led to discussions about potential sanctions on Chinese banks, a move that could have significant implications for global trade.

During a meeting held in Beijing last week, U.S. Secretary of State Antony Blinken expressed apprehensions regarding China’s backing of Russia’s military actions, which could potentially strain the ongoing endeavors to improve relations between the two nations.

U.S. Treasury Secretary Janet Yellen has warned Chinese banks and exporters against aiding Russia’s military capacity, citing potential sanctions. This latest development suggests that Chinese banks are taking these warnings seriously, potentially signaling a shift in China’s approach to its relationship with Russia.

Meanwhile, China’s support for Russia has been a major point of contention in its relations with the U.S. and the EU. The U.S. has mooted sanctions on Chinese banks over their support for Russia’s war in Ukraine, a move that could further exacerbate tensions between the two superpowers.

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