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The author is a fellow at the Carnegie Russia and Eurasia Center in Berlin.
Russian President Vladimir Putin is set to visit China on his first foreign trip since securing another six years in the Kremlin. One of his main goals will be to find ways to minimize disruption to the economic lifeline that China has given the embattled regime since its full-scale invasion of Ukraine. . It is noteworthy that during Sunday’s cabinet reshuffle, key ministers related to China-Russia relations remained in office. His new defense minister, Andrei Belousov, is an economist with deep ties to the Chinese leadership.
Since February 2022, Beijing has been Russia’s largest market for oil and gas and a major source of imports. These range from harmless consumer goods to parts that power military machinery. Washington is now trying to stem the flow of Chinese military supplies that have allowed the Kremlin to overwhelm Ukraine and the West, forcing Ukrainian defenders to face Russian firepower superiority.
In December, the White House threatened to impose sanctions on any bank clearing payments to the Russian war machine. Earlier this year, U.S. Treasury Secretary Janet Yellen and Secretary of State Antony Blinken visited China and outlined the threats to Chinese leaders and financial institutions. So far, these seem to have had some effect. China’s exports to Russia fell by 15.7% in March and 13.5% in April compared to the same period last year.
I hope this will finally solve the problem, but that’s wishful thinking. Over the past two years, the Russian and Chinese governments have demonstrated a remarkable ability to adapt to U.S. regulations. Putin’s visit provides a new opportunity to brainstorm options privately before implementing them quietly. He is expected to be accompanied by an experienced team from the central bank and finance ministry, which has been responsible for the Kremlin’s push to weaken the dollar in Russia’s financial system since 2014. Their bold actions allowed Russia to withstand the shock of the initial sanctions and then recover. Rapidly switch the financial system from dependence on the dollar and euro to dependence on the renminbi.
By December 2023, the renminbi accounted for more than a third of the payments in Russia’s trade with foreign partners, up from virtually zero before the full-scale invasion of Ukraine. Russia’s yuan deposits will reach $68.7 billion in 2023, exceeding its dollar holdings. Russian central bank data showed renminbi-denominated loans soared nearly fourfold to $46.1 billion, mainly due to the conversion of debt from dollars and euros to renminbi.
Russia and China use local infrastructure to facilitate and clear transactions. In response to sanctions in 2014, Russia established a domestic analog of Swift, known as the Bank of Russia (SPFS) Financial Messaging System, and its use is now mandatory. China operates its own cross-border interbank payment system (CIPS), which currently includes about 30 Russian banks. Cips cannot match Swift in terms of production, but the Ukraine war has spurred its expansion. Daily trading is reported to have increased by 50% in 2022 and another 25% in the first three quarters of 2023. Cips doesn’t just process payments between China and Russia. For example, in April 2023, Bangladesh used the funds to pay the Russian Atomic Energy Agency in RMB for the construction of a nuclear power plant.
But this alone does not protect Chinese banks from sanctions if the US government discovers prohibited transactions. The next step for Moscow and Beijing will therefore be to build a sophisticated infrastructure to clear the most sensitive payments. This is unlikely to include the large Chinese banks integrated into the global financial system, but some of its 4,500 local banks already have pen-pal relationships with Russian banks. Schemes to clear questionable payments could involve small banks trading only in their own currencies and using only local infrastructure. Multiple shell companies, including those from Central Asia and the Gulf, are likely to be involved as intermediaries. Of course, such a deal would be more expensive and time-consuming, but it would also be much harder for the United States to spot and police.
Of course, for now such mechanisms are only patchwork solutions. Sooner or later, they are likely to be discovered by the sharp eyes of the US government. But by using the Russian economy as a giant sandbox, Chinese authorities can fine-tune the financial infrastructure available to other countries seeking an antidote to Washington’s weaponization of the dollar.
