Major Chinese banks are halting operations with Russian entities on the Moscow Exchange due to U.S. sanctions. This development significantly impacts Russia’s reliance on the Chinese yuan amid ongoing economic restrictions resulting from the war in Ukraine. The Bank of China’s Russian division has notably suspended transactions with sanctioned Russian banks to avoid secondary sanctions, as reported by Kommersant.
Over the past two weeks, trading in the Chinese currency has dropped sharply. The average transaction size fell by 14% to RUB 1.89 million (approximately $21,600), the lowest level since February 2023. The suspension of yuan trading poses a considerable challenge for the Russian economy, as highlighted by Elvira Nabiullina, governor of the Central Bank of Russia. Nabiullina acknowledged the risks, including the potential suspension of yuan exchange trading.
The decision by Chinese banks to cease operations with sanctioned Russian entities follows the expansion of U.S. sanctions against Russia. These sanctions target foreign financial institutions that continue to do business with sanctioned Russian individuals and entities. The Bank of China’s suspension of transactions is part of a broader trend, with other major Chinese banks like Industrial and Commercial Bank of China, China Construction Bank, and Zhejiang Chouzhou Commercial Bank also curbing operations with Russia.
The withdrawal of Chinese banks from the Moscow Exchange complicates Russia’s financial transactions and increases the risk of fraud, as payments may shift to less transparent intermediaries. An industry insider expressed concerns about increased costs and reduced state control over payments. This situation is further exacerbated by the need for Russia to find alternative payment channels, which may not be as efficient or secure.
In response to the suspension of yuan transactions, Russia has explored alternative payment methods. One approach involves smaller regional banks near the Russian-Chinese border, aiming to bypass U.S. sanctions temporarily. However, these measures are seen as stop-gap solutions and may not provide long-term stability.
Despite these challenges, the yuan has become increasingly significant in Russian trade. The currency now accounts for more than a third of all Russian exports, up from 0.4% before the invasion of Ukraine. However, the shift from exchange markets to over-the-counter (OTC) markets for yuan transactions indicates a move to circumvent the sanctions’ impact.
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