#UKRAINERUSSIAWAR. How to evade sanctions

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Trade options between Russia and China have narrowed since the United States imposed sanctions last week on Russia’s only banking branch in China, but President Vladimir Putin’s Chinese visit last month helped ensure the two countries have payment alternatives for now.

Since Putin’s visit, specially licensed banks have been created in border regions that allow Russian companies to open accounts for non-residents at Chinese banks, a step that has become more important after the VTB branch in Shanghai was targeted with sanctions, Reuters reports.

Trade between Russia and China rose to a record $240 billion in 2023. Maintaining the flow of revenue and goods, which is critical for the Kremlin, depends on ensuring regular payments.

The workaround, involving smaller regional banks that can fly below the radar of US sanctions for now, shows how Moscow and Beijing must take increasingly complex measures to ensure that bilateral payments continue to be made, but at the same time at the same time potentially exposing some. Chinese financial firms face US sanctions in an attempt to evade them.

The use of banks in border regions facilitates the movement of intermediaries working on behalf of Russian companies. The scheme, which involves small banks with little or no business with countries Russia considers hostile, also reduces the potential fallout for China.

However, the time window for making payments for Russian companies may shorten. The US Treasury is reportedly working to identify smaller banks with weaker compliance departments that are still helping process transactions that aid Russia’s military production.

Trade with Beijing has become more important for Moscow since February 2022. Russian banks were subsequently blocked by Swift, while many Western countries and companies severed ties with Russia.

Only a handful of banks, located near the border in the northeast, still work with Russia, a second banking source said.

VTB was already under sanctions, but the US Treasury has amended restrictions on previously targeted Russian banks to include foreign entities, including VTB’s Shanghai branch, a step that sources said would complicate payment flows.

When a Russian company buys or sells goods or services with a Chinese business partner, it must be able to receive or pay money through payment systems operated by banks.

Russia’s largest private credit institution, Alfa Bank, has been working for months on opening two Chinese branches, in Shanghai and Beijing, but without success. That hasn’t stopped it from touting its China credentials with a huge inflated red dragon adorning its stand at the St. Petersburg economic forum this month.

The threat of secondary sanctions, which could prevent institutions from accessing the dollar, has spooked Chinese banks into losing access to global markets, even if there is profitable trade to be had with Russia.

For Russia, payment problems hurt export earnings, disrupt supply chains and raise import prices, the central bank said, while its oil companies face months-long payment delays.

Unsanctioned Russian banks are still acceptable to Chinese partners, but the US restrictions are a death blow, with even specially authorized Chinese banks blocking deals.

Antonio Albanese 

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