The Central Bank of Russia is facing key challenges as the country may not be able to rely on the Chinese currency as originally hoped due to 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, stated that payments issues were among the key challenges facing the Russian economy and that potential risks, including the risk of suspension of exchange trading in the yuan, are being considered. Russia has become increasingly dependent on the Chinese currency after being cut off from the SWIFT banking system in response to the war in Ukraine.
A number of China’s state-owned banks have tightened restrictions on funding to Russian firms in response to the U.S. Treasury Department’s announcement of imposing secondary sanctions on foreign banks conducting business with companies that support Russia’s defense industry. Three of China’s largest banks, as well as other financial institutions, halted accepting payments from sanctioned Russian financial institutions due to the risks of secondary sanctions from the United States. This move by Chinese banks signals their fear of breaking U.S.-led sanctions, which has led to a decrease in settlements in U.S. dollars in trade with Russia and an increase in settlement in Chinese yuan.
The Russia division of the Bank of China suspended transactions with Russian banks sanctioned by the U.S. over the war in Ukraine, showing how Chinese banks are striving to comply with U.S. sanctions to mitigate their own risks. This shift in payment methods has been attributed to U.S. President Joe Biden’s Executive Order, which creates new risks of secondary sanctions for financial institutions in China. Chinese banks have been suspending operations to assess these new risks and update their compliance requirements, highlighting the challenges faced by countries navigating economic relations in a complex global market where U.S. sanctions can impact transactions between other countries.
Despite the challenges posed by U.S. sanctions and the restrictions imposed by Chinese banks, Russia is not financially isolated given its continued export of goods such as oil and natural gas to the global market. The Central Bank of Russia emphasized that as long as there is demand for Russian export goods from economic entities in many countries, the risk of complete financial isolation remains low. However, the issue of payments and the ability to continue trading in the global market while facing sanctions from major economic players like the U.S. and constraints from Chinese financial institutions are significant obstacles that Russia must navigate to ensure economic stability and growth.
The actions taken by Chinese banks in response to U.S. sanctions have implications for Russia’s economic ties with China and raise questions about the level of dependence Russia can have on the Chinese currency for trade and financial transactions. The tightening restrictions on funding from Chinese banks and the shift towards yuan settlements in trade with Russia indicate the challenges faced by both countries in maintaining economic relations amidst geopolitical tensions and varying levels of compliance with international sanctions. The uncertain nature of the global market and the impacts of geopolitical conflicts on financial systems highlight the complexities of international trade and the need for countries like Russia to explore multiple avenues for sustaining economic stability. Newsweek is committed to covering these developments and finding connections in the search for common ground amidst evolving global dynamics.