For over half a year, Russian companies have been facing difficulties in processing payments with China. Fearing secondary sanctions, banks are refusing to transfer funds, leaving importers unable to bring goods into the country. Vladimir Putin raised this issue during his visit to Beijing in May, but the situation doesn’t seem to have improved.
On December 22, 2023, U.S. President Joe Biden signed an executive order allowing sanctions to be imposed on banks from third countries if they are caught aiding the Russian military-industrial complex. Once blacklisted, these companies would be banned from holding correspondent accounts in American banks, meaning they’d be unable to conduct any dollar transactions. Following this order, dozens of Chinese financial organizations refused to accept transfers from Russia — not only in U.S. dollars but also in Chinese yuan.
On June 12 of this year, Washington tightened its demands. Previously, transactions involving five sectors of the Russian economy — technology, defense, construction, aerospace, and manufacturing — were under scrutiny. Now, the U.S. Treasury has expanded the definition of the military-industrial complex to include all companies previously sanctioned under Executive Order No. 14024. This means that the number of Russian entities that foreign banks must avoid to maintain access to dollar transactions has significantly increased. According to Castellum.AI, there are more than 4,000 such organizations.
Biden’s executive order — neither in its new nor old versions — has yet to be enforced against banks from third countries. So far, representatives of the U.S. administration have only issued verbal warnings: Secretary of State Antony Blinken expressed “serious concern” about the supply of machines and microelectronics to Russia, and Treasury Secretary Janet Yellen publicly mentioned the sanctions risk during her visit to China in early April.
This was enough to trigger significant shifts in trade between Russia and China. By the end of 2023, trade turnover had increased by 26 percent to a record $240 billion. However, in April 2024, China’s customs authority reported a 15 percent reduction in deliveries of cars, equipment, and other machinery. Bloomberg noted that exports to Russia fell for the first time in two years, linking this to sanctions risks. Chinese exports to Russia also fell in May, and Russian customs confirmed the continued decline of imports from Asia. Russia’s Central Bank acknowledged that it had become generally more difficult for Russian banks to open correspondent accounts abroad, even in “friendly” currencies, and directly linked this to “sanctions the United States adopted in December 2023.”
The issue was also discussed at the St. Petersburg International Economic Forum. Industry players reported that money transfers from Russia to China could take as long as three months, and even then might end up being returned to the sender. Businesses complained that they couldn’t even pay for theater decorations or children’s displays. Pavel Brun, the head of MasterProf, said his company hasn’t been able to arrange the supply of plumbing fixtures. “It’s like walking through a minefield,” he told Business FM.
Finding a workaround
Some hopes were pinned on Vladimir Putin’s mid-May visit to China. However, although Putin mentioned that the payment issue was discussed, he didn’t provide any specifics, and business owners confirmed that the difficulties in making payments persisted even after the delegation returned to Moscow.
A source in the trade industry told Reuters that the typical way Russian businessmen solve this problem is by going “from bank to bank, opening current accounts.” “If their payment doesn’t go through, they go to the next one,” the source explained. In response, Chinese financial institutions have started imposing additional requirements, such as asking for an office lease agreement in the province where the bank is located. “While this would have seemed like a harsh requirement before, we have no choice now,” business owners commented to Kommersant FM.
One of the most promising options was to open an account at the Chinese branch of the Russian bank VTB. The demand for this was so high that businesses were often left waiting as long as a year to open an account. VTB Bank CEO Andrey Kostin promised to more than double the staff to speed up this service. However, in its broadened interpretation of Russia’s military-industrial complex, the U.S. Treasury directly named VTB as one of the banned entities for transactions. This will likely complicate the bank’s operations.
As an alternative, businesses have started using banks in third countries as intermediaries, sending money through companies in Hong Kong, Kazakhstan, Kyrgyzstan, the U.A.E., and other “friendly” jurisdictions, rather than directly from Russia, according to Reuters sources. This scheme can prove costly: intermediaries may charge a commission of several thousand dollars per transaction, they don’t guarantee success, and the sender will have trouble getting the money back if the payment fails. Goods may also be confiscated in the intermediary countries. Nevertheless, half of the payments are currently processed this way.
Some companies have started using cryptocurrency to make payments to China, specifically the stablecoin Tether, which is pegged to the U.S. dollar, reports Bloomberg. Instead of waiting months, payments are processed in 5-15 seconds, and without the hefty commissions intermediaries charge. However, there are risks for Chinese partners: since 2021, the local regulator has deemed all cryptocurrency transactions illegal. To circumvent these issues, an even more unorthodox solution has been devised: Russian steel companies are now bartering metal for any goods that Chinese businesses are willing to offer. This way, no cross-border financial transactions are needed at all. Both Russian customs and the Industry and Trade Ministry have noted the growing popularity of this bartering system.
If businesses still need to make monetary payments, they often turn to small rural banks in northeastern China. According to Reuters, these banks, located along the Russian border, are willing to accept transfers and have less stringent compliance requirements. However, due to high demand, even these banks have waiting lists to open an account that stretch for several months.
The System for Transfer of Financial Messages (SPFS) — Russia’s SWIFT analogue for domestic and international transactions — could potentially help. However, VTB has complained that too few foreign companies are currently connected to it. Additionally, the system was developed by the Central Bank, which deters non-residents from using it due to sanctions risks. And with good reason: Bloomberg pointed out that the E.U. and the G7 could jointly impose sanctions for connecting to the system.
Ripple effects
Paradoxically, the current payment issues are having a positive impact on the Russian economy. The inability to transfer money has hit imports, thereby reducing the demand for foreign currency. This supports the ruble exchange rate, as noted in the Central Bank in official reports. The bank doesn’t believe this factor will have a significant impact on GDP.
However, as Sofia Donets, the chief economist at Tinkoff Investments, told RBC, these problems will ultimately lead to additional costs for sellers. The Moscow-based investment company Tsifra Broker concurs that prices for many goods could rise if timely shipments can’t be ensured. Categories making up the largest share of Chinese exports to Russia are at risk: equipment, land transport vehicles, electrical machinery, and electrical equipment.
Currently, importers are complaining that fraudsters are trying to exploit the situation: they write to Russian entrepreneurs posing as Chinese partners and notify them of a change in banking details. There’s been at least one known case where a business ended up sending money to an account, only to find that they couldn’t reach the sender afterward and were left without the paid-for goods.
Some market participants believe that resolving the payment crisis will depend on how much banks can earn from conducting such operations. For instance, Anatoly Semenov, director of the Parallel Import Association, points out that so long as the markets of countries unfriendly to Russia are of interest to Chinese businesses, they won’t openly violate the sanctions regime and risk their investments. Banks in Turkey and the U.A.E. are also refusing transactions with Russia. Against this backdrop, The Bell estimates that imports from some countries have dropped by a third this year.
Russian steel companies are now bartering metal for any goods that Chinese businesses are willing to offer. This way, no cross-border financial transactions are needed at all.
Cryptocurrency: Even less convenient than the barter system.
If you don’t want your payments to be tracked, then it really is.
Here’s a crazy idea, they withdraw from Ukraine, and it all stops!
lol. pegged to the us dollar. yeah because the reserves are well vetted. youll be pegged alright.
Some companies have started using cryptocurrency to make payments to China, specifically the stablecoin Tether, which is pegged to the U.S. dollar, reports Bloomberg.
You can’t just announce that you have a new currency that is pegged to a currency. You can peg one currency to another, but only by expending resources to keep the values together, regardless of other relative demand for each.
Even if you have a lot of resources, it’s not always possible to maintain a peg.
How does this work?
kagis
https://www.investopedia.com/tethers-ability-to-maintain-dollar-peg-constrained-says-s-and-p-8414907
Tether (USDT), the largest stablecoin by market capitalization, may be “constrained” in its ability to maintain its peg to the U.S. dollar, S&P Global Ratings said Tuesday, citing concerns about its reserve transparency and risk appetite, among other issues.1
The ratings agency gave an asset assessment score of 4 out of 5, with a 1 being the best possible score.
“Our asset assessment of 4 (constrained) reflects a lack of information on entities that are custodians, counterparties, or bank account providers of USDT’s reserves,” says the report.
So, What’s Bothering S&P Global About Tether?
Now, Tether discloses details about its reserves every quarter and the ratings agency analyzed the latest data where it found some concerns.
First, the S&P assessment points out that much of Tether’s reserves are held in “low-risk assets” like short-term U.S. treasuries. Even in those cases, Tether does not offer information about “custodians, counterparties, or bank account providers of the assets.”
Tether’s reserves also include double-digit and opaque exposure to riskier assets.
“The riskier assets making up 15% of the collateralization ratio comprise corporate bonds, precious metals, bitcoin, secured loans, and other investments,” the report adds. “Given the type of assets and limited transparency on their composition, such as their denomination and the borrowers of the secured loans, there is potential exposure to credit, market, currency, and interest risks that cannot be quantified.”
The report also points to the lack of a regulatory framework, limitations on primary redeemability, and lack of asset segregation as other shortcomings of the stablecoin.
This is not the first time Tether’s reserves have received attention. In 2021, Tether was a subject of enforcement actions by the Commodity Futures Trading Commission (CFTC) and New York Attorney General for improper information about the reserves backing the stablecoin.23
That sounds like it doesn’t. Like, someone might be willing to sell you this at a fixed rate, but if those backing reserves become exhausted, there’s no guarantee that you don’t wind up in a situation where you can’t get dollars back.
This is true. A couple of years ago Tether (along with its sister company Bitfinex, a crypto currency exchange) settled allegations by the New York state in the U.S. by paying a fine (in the double-digit millions), admitting that claims that Tether was backed by fiat at all times was “a lie”.
A major issue with this coin is that it is not subject to regulation by any authority (it’s owned by iFinex based in the British Virgin Islands), so they may claim whatever they want.
I don’t know what exactly made them choose Tether, but one reason might indeed be that they don’t have much choice (alternative crypto coins are arguably far too volatile to serve as a means of payment for companies with higher bills). Maybe because the company has an office in Hong Kong as far ad I know (at least they had one not long ago). Maybe also because there is a higher volume, maybe because there is also a Tether variant pegged to the Chinese yuan (it hss the same shortcomings as the USDT, but a much lower volume). I don’t know.
But let’s not forget that it can be tracked as it’s on a blockchain. If they seek to circumvent sanctions and hide their money trail, that’s not a good idea.
In a nutshell: anyone who says that the sanctions don’t work should read stories like that and they might change their mind.
