Analysis: Chinese banks scramble to find ‘workarounds’ as Russian sanctions encroach

A view of the city skyline and the Huangpu River, ahead of the annual National People’s Congress (NPC), in Shanghai, China February 24, 2022. REUTERS/Aly Song

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March 3 (Reuters) – China’s big banks are racing to ensure they can maintain business relationships with Russian customers without facing a barrage of Western sanctions, people familiar with the matter told Reuters .

Western nations are tightening the economic noose around Russia after its invasion of Ukraine, shutting down its SWIFT global financial network banks and pushing global corporations to pour billions in investment. Read more

As China’s banking regulator said this week the country would not join the West’s sanctions on Russia, some of its banks have stopped issuing dollar-denominated letters of credit for purchases of physical commodities. , sources said.

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And now the heads of some major Chinese banks are exploring alternative payment systems as well as the possibility of transferring some of their business to smaller domestic counterparts to avoid getting caught in secondary sanctions, said two bankers with knowledge of the matter. .

Secondary sanctions are restrictions that apply to entities that do business in US dollars with the underlying sanctioned entity. An entity found to be in violation of these sanctions runs the risk of being cut off from sources of US dollar liquidity.

“Sanctions don’t apply directly to us and we can lend to Russian entities – but is it wise? Do we approve this loan to only this entity? It’s not the best thing to do at the moment, is not it ?” said an executive at a China-led development bank.

“The internal perception is that if the sanctions get worse on SWIFT, we can find ways around them,” said the executive, who did not wish to be identified.

A potential “workaround” would be for smaller local Chinese banks to work on deals that their larger peers with overseas business interests need to avoid, said a banker at one of China’s four major lenders owned by China. the state, who also declined to be named.

The executive said his bank had stopped issuing dollar-denominated letters of credit for purchases of Russian commodities, but also that he had not yet seen an impact on yuan-denominated transactions between China and Russia.

Big Chinese banks with overseas operations and branches could become very cautious as Washington and its allies can sanction operations in Western markets for violations, said Wang Yongli, a former board member. from SWIFT.

“Small (Chinese) banks that don’t have a lot of overseas presence might dare to do that because you can’t come to China to sanction them,” said Wang, who is also a former executive director of the bank. of China, during a call with investors on Wednesday.

All of the banking sources Reuters spoke to for this story declined to be named because they were not authorized to speak to the media.

The China Banking and Insurance Regulatory Commission did not respond to Reuters’ request for comment.

NAVIGATING PENALTIES

China is Russia’s biggest trading partner, buying a third of Russia’s crude oil exports in 2020 and supplying it with manufactured goods ranging from cellphones and computers to toys and clothing.

However, analysts say China’s big four state-owned banks’ exposure to Russia is limited.

Among them, Industrial and Commercial Bank of China Ltd (601398.SS) is one of the largest Chinese banks in Russia and the first to provide yuan clearing services there. But even its local operations accounted for less than 1% of its total assets at the end of June 2021, according to its semi-annual report.

Amid the sanctions, some Russian companies are scrambling to open accounts with Chinese banks as they seek to use the yuan more for trade, sources say.

So far, China does not appear to be helping Russia evade Western financial sanctions against Moscow, but it would “deeply damage” China’s reputation, a senior Biden administration official said on Saturday.

Investment bank Natixis said Western economies were less likely to continue to “engage wholeheartedly” in China’s financial sector if Russia saw it as a solution to its sanctions.

Some overseas branches of Chinese lenders took immediate action to comply with the sanctions – the Bank of China’s operation in Singapore stopped funding deals involving Russian oil and companies.

In others, where the sanctions have a less direct impact, internal meetings are held on new risks and on the search for an alternative to SWIFT, even if some bankers admit that there is currently no possible replacement.

While work was underway to develop an alternative messaging system to SWIFT, it was not yet fully operational, Natixis’ Alicia Garcia Herrero and Junyu Tan wrote in the report.

On whether Russia could indeed use China’s own cross-border interbank payment system to circumvent sanctions, Natixis said the Chinese system was illiquid and the number of foreign institutions linked to it remained limited.

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Reporting by Engen Tham and Julie Zhu; additional reporting by Zoey Zhang; Editing by Sumeet Chatterjee and Sam Holmes

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