Russia may not be able to rely on the Chinese currency as initially hoped, as Beijing's banks are forced to comply with U.S. sanctions imposed on Russian President Vladimir Putin's economy in response to the war in Ukraine.
Elvira Nabiullina, the governor of the Central Bank of Russia, said on Thursday that payments issues were one of the key challenges facing the Russian economy. The Central Bank of Russia is taking into account all possible risks, including the risk of suspension of exchange trading in the yuan, Nabiullina told reporters.
Newsweek contacted Russia's Foreign Ministry for comment by email.
Russia had become increasingly dependent on the Chinese currency after the country was cut off from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) banking system in response to the war in Ukraine.
However, a number of China's state-owned banks have recently tightened curbs on funding to Russian firms. This was in response to the U.S. Treasury Department's announcement in December that it would impose secondary sanctions on foreign banks conducting business with companies that support Russia's defense industry.
"We take all the risks into account," Nabiullina, Putin's top banker, told a press conference in St. Petersburg when asked whether the regulator sees any risk of exchange trading in the yuan being suspended.
Nabiullina added that Russia is not financially isolated, given that it still exports goods, such as oil and natural gas, to the global market.
"Risks of complete financial isolation may occur only if the global market does not need our export goods. Payments are made while they are needed, and economic entities in many countries need our market; the economic interest is in place," Nabiullina said.
In February, three of China's largest banks—Industrial and Commercial Bank of China, China Construction Bank and Bank of China—stopped accepting payments from sanctioned Russian financial institutions.
The decision was made due to the "risks of secondary sanctions" from the United States, Russian newspaper Izvestia reported at the time. These banks rank first, third and fourth in terms of assets in China, respectively.
Zhejiang Chouzhou Commercial Bank, the leading Chinese bank used by Russian importers, also halted operations in Russia in February, Russian business newspaper Vedomosti reported.
And last month, the Russia division of the Bank of China, which focuses on payments denominated in yuan, halted transactions with Russian banks sanctioned by the U.S. over the war in Ukraine, Russian newspaper Kommersant reported, citing financial sector sources.
An expert previously told Newsweek that the move showed how much Chinese firms fear breaking U.S.-led sanctions.
"Chinese banks strive to comply with U.S. sanctions; therefore, to reduce their own risks, settlements in U.S. dollars in trade with Russia have practically ceased and have been replaced by Chinese yuan settlements," said Pavel Bazhanov, a Russian lawyer who provides legal support for Russian businesses in China and the wider region.
Bazhanov said that U.S. President Joe Biden's Executive Order 14114, issued on December 22, 2023, "creates a new risk of secondary sanctions" for financial institutions in China.
"Chinese banks are suspending operations to assess the new risks and update their compliance requirements," Bazhanov added.
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Isabel van Brugen is a Newsweek Reporter based in Kuala Lumpur. Her focus is reporting on the Russia-Ukraine war. Isabel ... Read more
