Reports indicate that Chinese banks have intensified their limitations on payments originating from Russia, as sanctions imposed in response to Vladimir Putin's extensive invasion of Ukraine jeopardize trade relations between the two nations.

While the Russian president has claimed significant growth in trade with China, there is a rising apprehension among Chinese authorities regarding the potential repercussions of violating Western sanctions aimed at undermining Moscow's military efforts.

According to the business publication Kommersant, these banking restrictions in China have been escalating since December 2023, following an executive order from U.S. President Joe Biden that threatens to restrict Chinese financial institutions' access to the U.S. financial system if they engage in trade associated with Russia's military sector.

Recently, the Russian branch of the Bank of China ceased processing yuan transactions with Russian banks that have been sanctioned by the United States, a move echoed by ICBC, China CITIC Bank, and most other Chinese financial institutions.

Kommersant reported on July 29 that Russian companies are facing increasing challenges when making cross-border payments in Chinese currency. According to the report, approximately 80 percent of yuan payments are being sent back to Russia, with the transfer process sometimes lasting for weeks before being abruptly canceled without explanation.

An undisclosed source informed the publication that despite everyone taking their commission, the actual payment does not go through. Alexei Sapozhnikov, managing partner of Sapozhnikov and Partners consulting firm, mentioned to the newspaper that banks do not request any additional information, resulting in funds being held in correspondent accounts for up to 40 days before being returned.

As a result, Russian companies are being compelled to turn to intermediaries, such as "trading houses," to handle payments and logistics, albeit at a cost increase of up to 10 percent, as per Kommersant's findings.

The main issue in payments between Chinese and Russian companies is the lack of predictability, according to Pavel Bazhanov, a Russian attorney who offers legal assistance to Russian enterprises in China and the surrounding areas. He explained to Newsweek that the foundation of any trade is the expectation that the buyer will receive the goods and the seller will receive payment for those goods in a timely manner. However, the imposition of sanctions disrupts normal trade operations, creating uncertainty for Chinese businesses regarding payments from Russia. This uncertainty can lead to delays, non-delivery of payments, or changes in previously agreed upon terms and conditions.

Bazhanov mentioned that there are still alternatives for receiving payments from Russia in Chinese yuan or Russian rubles. For example, a Chinese company could establish a bank account at VTB Shanghai Bank, a Chinese subsidiary of the Russian VTB Bank. Another option is to utilize smaller Chinese rural banks near the Russian-Chinese border, which are less involved in U.S.-China trade and primarily serve clients engaged in cross-border business.

Despite potential challenges, Bazhanov believes that Russian and Chinese companies will find ways to continue doing business even if Chinese banks cease handling payments to or from Russia. However, the unpredictability of new payment methods will likely result in increased transaction costs and higher prices for Chinese imports in the Russian market.

leg Ushakov, the founder of the renowned Russian law firm Sagrada Legal, shared his insightful perspective with Kommersant regarding the potential resolution of cross-border payment challenges through the utilization of digital assets and cryptocurrencies.

However, it is crucial to acknowledge the current regulatory landscape, which necessitates the registration of foreign counterparties on Russian platforms for digital asset transactions. This requirement introduces the risk of potential secondary sanctions, which must be carefully considered and managed.