Chinese Banks Cautious Amid Rising U.S. Sanctions Pressure

As the spectre of secondary sanctions looms large, Chinese banks are increasingly wary of facilitating trade with Russia, leading to significant delays for companies seeking financial transactions. Amid the challenging landscape, VTB Bank, Russia’s largest state-owned bank, stands out as a vital conduit for Russo-Chinese financial activities, leveraging its Shanghai branch as a pivotal hub.

The backdrop to this scenario traces back to the aftermath of Russia’s military intervention in Ukraine in February 2022, which prompted a wave of sanctions from the United States and its Western allies. In response, Russian banks swiftly sought refuge in China, with the majority establishing yuan accounts in Chinese banks by the end of the year, aiming to circumvent the restrictions imposed on Russia’s financial sector.

However, recent reports indicate mounting obstacles for Russian businesses, particularly in receiving payments for crude oil and fuel exports. Chinese, Turkish, and Emirati banks, wary of potential repercussions from U.S. secondary sanctions, are adopting a cautious approach, leading to protracted delays in financial transactions.

These challenges have culminated in a bottleneck scenario at VTB Bank’s Shanghai branch, the sole Russian bank boasting a fully operational presence in China. Sources familiar with the matter reveal that the bank is grappling with an influx of prospective account holders, resulting in waiting periods stretching up to six months for companies eager to establish accounts.

Despite inquiries, VTB Bank declined to comment on the situation, underscoring the sensitivity of the matter. While alternative payment avenues exist, such as transactions through subsidiaries of smaller Chinese banks in Russia, the prominence of VTB Bank’s Shanghai branch underscores the profound impact of U.S. sanctions on global financial flows.

Presently, the opening of an account at a Russian bank’s Chinese branch emerges as the most viable payment route between the two countries, as recommended by legal experts. However, the sole reliance on VTB Bank’s infrastructure presents challenges, exacerbated by the bank’s prioritisation of large clients amid overwhelming demand.

Russian business entities have increasingly voiced concerns regarding settlement issues with Chinese banks, citing instances of rejection and suspension of operations. The queue for opening accounts at VTB Shanghai, lasting up to three months, reflects the acute strains in Russo-Chinese financial relations.

Furthermore, the prospect of additional Russian bank branches in China remains uncertain, with Sberbank’s attempts reportedly thwarted by regulatory hurdles. The failure to diversify banking options exacerbates compliance challenges and deepens the prevailing trust deficit between Russian and Chinese financial institutions.

As payment delays persist, they not only impact revenue streams for Russian businesses but also serve as a tool for Washington to achieve its dual policy objectives: disrupting Kremlin finances while minimising disruptions to global energy markets. While the situation underscores the resilience of Russo-Chinese economic ties, it also highlights the profound implications of geopolitical tensions on financial networks, underscoring the imperative for diplomatic resolutions to safeguard global economic stability.