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EXCLUSIVE: RUSSIA PAYMENT HURDLES WITH CHINA PARTNERS INTENSIFIED IN AUGUST

By Reuters
August 29, 202410:08 PM PDTUpdated 6 hours ago
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Banknotes of Chinese yuan and Russian rouble are seen amid flags of China and
Russia in this illustration picture taken September 15, 2022. REUTERS/Florence
Lo/Illustration/File Photo Purchase Licensing Rights, opens new tab
 * Summary

 * Billions of yuan stuck in Russia-China transactions
 * Intermediaries' fees have risen to 6% from near zero - sources
 * Payments between large state companies are coming through

MOSCOW, Aug 30 (Reuters) - Some Russian companies are facing growing delays and
rising costs on payments with trading partners in China, leaving transactions
worth tens of billions of yuan in limbo, Russian sources with direct knowledge
of the issue told Reuters.
Russian companies and officials for a few months have pointed to delays in
transactions after Chinese banks tightened compliance following Western threats
of secondary sanctions for dealing with Russia. The sources said the problem has
intensified this month.
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Chinese state banks are shutting down transactions with Russia "en masse" and
billions of yuan worth of payments are held up, a source close to the
government, who spoke on condition of anonymity, told Reuters.
China is Russia's largest trading partner, accounting for a third of Russia's
foreign trade last year and supplying items such as vital industrial equipment
and consumer goods that help Russia weather Western sanctions. It also provides
a lucrative market for many Russian exports that China relies on, from oil and
gas to agricultural products.
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After the U.S. Treasury in June threatened secondary sanctions on banks in China
and other countries for dealing with Russia, Chinese banks started to take a
very strict stance on transactions, said a source at one of Russia's leading
e-commerce platforms. It sells a wide variety of consumer goods imported from
China.
"At that moment, all cross-border payments to China stopped. We found solutions,
but it took about three weeks, which is a very long time, trade volumes fell
drastically during that time," said the source.

One working solution was to buy gold, move it to Hong Kong and sell it there,
depositing cash in a local bank account, the person said.
Sources told Reuters that some Russian businesses have been using chains of
intermediaries in third countries to handle their transactions and get around
compliance checks run by Chinese banks. As a result, costs to process
transactions have risen to as much as 6% of transaction payments, from close to
zero before, they said.

The sources spoke on condition of anonymity because of the sensitivity of the
matter.
"For many small companies, this means a complete shutdown," another source close
to the government said.
The Kremlin acknowledged the problem but said that economic cooperation is
important for both countries and that solutions will be found.
"With such volumes and in such an unfriendly environment, it is impossible to
avoid some problematic situations," Kremlin spokesman Dmitry Peskov said in a
statement to Reuters.

"However, the truly partnership spirit of our relations allows us to discuss and
resolve current issues constructively," he said.
Transactions with China are not of grave concern to top Russian leadership,
however, because payments in priority areas are still proceeding smoothly, and
there is political will from both sides, a banking source told Reuters.Bilateral
arrangements for large companies, such as Russia's commodity exporters and
China's exporters of vital technologies, still work well, whereas smaller
companies trading in consumer goods experience problems, sources said.
Russian exporters haven't experienced difficulties in receiving payments for
commodities that China imports, such as oil or grain, another source close to
the Russian government told Reuters.
Bilateral trade between Russia and China grew by 1.6% to $137 billion in the
first half of 2024, according to China's official customs data, after hitting a
record high $240 billion in 2023.
"Normal trade between China and Russia is consistent with WTO rules and market
principles, is not directed against third parties and is not subject to
interference or coercion by third parties," a Chinese foreign ministry spokesman
told Reuters.
"We firmly oppose any illegal unilateral sanctions and "long-arm jurisdiction"
and will take all necessary measures to safeguard our legitimate rights and
interests," the spokesman added.
Russia's imports from China fell by more than 1% to $62 billion in January-July
2024 due to payment problems, according to China's official statistics.
Russia's central bank forecasts the country's total imports from around the
world will fall by as much as 3% this year.
"Imports will decrease in 2024 due to the strengthening of sanctions barriers
related to payments and logistics," the central bank said, although it predicted
that the situation would improve in the medium term, according to draft monetary
policy guidelines published on Aug. 29.After Russian President Vladimir Putin's
visit to China in May, some local Chinese banks without a global business
stepped in to handle bilateral payments. They would be out of the reach of
Western sanctions enforcers.
However, sources pointed out that these banks often had outdated IT systems and
lacked staff with the necessary skills.
The banking source said that cross-border couriers were shuttling transfer
papers across the Russia-China border to get them physically stamped and signed
by Chinese bankers.
"Until issues with payments are resolved at the state level, we cannot expect a
dynamic inflow of investments from China," said Kirill Babaev, head of the China
Institute at the Russian Academy of Sciences.
Research co-authored by Babaev and released this month highlights the risks
posed to Russia's industrial sector where China has become a leading supplier.
"In today's situation, payment problems with Chinese banks particularly
exacerbate this challenge, as there are no other major suppliers of many types
of industrial equipment besides China at present," the research paper said.
Large companies in China as well as India are heavily dependent on American and
European markets, Dmitry Birichevski, head of the economic department at
Russia's foreign ministry, said at a conference in Moscow on Aug. 16.
"And they are being told, 'Guys, if you continue to work with Russia, we will
cut off your access to our market and choke off your oxygen supply'," he said.

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newsletter. Sign up here.

Reporting by Reuters in Moscow; Editing by Elisa Martinuzzi and Susan Fenton

Our Standards: The Thomson Reuters Trust Principles., opens new tab

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