Chinese Banks Tighten Restrictions on Russian Financing After U.S. Issues Secondary Sanctions Order

At least two banks have ordered a review of their Russian operations in recent weeks, focusing on cross-border transactions. The banks will cut ties with clients on the sanctions list and stop providing any financial services to Russian military-industrial firms, regardless of the currency or location of the transaction, the sources said.

The scrutiny will be extended to non-Russian clients who conduct business in Russia or transfer vital goods to Russia through third countries.

The move marks an escalation of restrictions imposed by China's state-owned banks since at least the beginning of 2022, when Russia's full-scale invasion of Ukraine triggered a wave of international sanctions, including from the United States. China's State Administration of Financial Supervision didn't immediately respond to Bloomberg's request for comment on the news.

The U.S. Treasury Department announced last month that it would impose secondary sanctions on banks that facilitate transactions for Russia's purchases of military-essential equipment, expanding the financial war against President Vladimir Putin.

The incident highlights the extent to which China has complied with U.S. sanctions, despite its principled opposition to them and its commitment to supporting economic ties with Russia, the report said. Beijing has avoided providing significant military aid to Russia while providing diplomatic support to Putin and expanding trade in areas not prohibited by sanctions.

Chinese exports to Russia increased dramatically during the Russo-Ukrainian war, making China Russia's largest importer of fossil fuels, and coal shipments have more than doubled since 2020. International sanctions have denied Russia's central bank access to about half of its foreign exchange reserves, leaving it with only gold and the yuan. The use of the yuan has increased, with the share of settlements in yuan rising to 27% as of last September, up from 15% at the end of 2021.

In the financial sector, Russian banks switched to China UnionPay in 2022 after VISA and MasterCard suspended operations. China's four largest state-owned banks have complied with previous U.S. sanctions against Iran and North Korea to avoid losing access to the dollar clearing system.

The Industrial and Commercial Bank of China (ICBC) and the Bank of China (BoC) took steps in February 2022 to restrict financing of Russian raw materials, although sanctions at the time did not affect Russia's energy sector. In the latest round of restrictions, banks were required to comply with strict thresholds without being able to confirm whether their Russia-related business sectors might be in violation of sanctions.

On December 22, 2023, U.S. President Joe Biden signed an executive order strengthening sanctions against financial institutions that aid Russia. These banks could be denied access to the U.S. financial system, essentially leading to the destruction of financial institutions.

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