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Putin’s trip to China may show that US threats are an illusion
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The writer is a member of the Carnegie Russia Eurasia Center in Berlin
Russian President Vladimir Putin is about to travel to China on his first trip abroad since securing another six years in the Kremlin. One of his main goals will be to find ways to minimize any disruption to the economic lifeline that China has given its embattled regime since the all-out invasion of Ukraine. It is notable that during his cabinet reshuffle on Sunday, key officials for Sino-Russian relations remained at the place. Its new Defense Minister, Andrei Belousov, is an economist with deep ties to the Chinese leadership.
Since February 2022, Beijing has become the largest market for Russian oil and gas, as well as an important source of imports. These range from innocent consumer goods to components that keep the military machine running. With the supply of Chinese dual-use goods helping the Kremlin outpace Ukrainian and Western production, leaving Ukrainian defenders with an advantage in Russian firepower, Washington is now seeking to cut off that flow.
In December, the White House threatened to impose sanctions on any bank clearing of payments to the Russian war machine. Earlier this year, US Treasury Secretary Janet Yellen and Secretary of State Antony Blinken visited China and laid out the threats to Chinese leaders and financial institutions. For now, this appears to have had some effect. Chinese exports to Russia fell by 15.7% in March and 13.5% in April, compared to the same period last year.
Hopes that this will resolve the issue conclusively, however, are illusory. Over the past two years, the Russian and Chinese governments have demonstrated a remarkable ability to adapt to US restrictions. Putin’s visit presents a new opportunity to debate options in private before implementing them discreetly. He is expected to be joined by an experienced team from the central bank and Ministry of Finance, which has been responsible for the Kremlin’s effort to de-dollarize the Russian financial system since 2014. His bold measures allowed the country to withstand the initial shock of sanctions and then change rapidly transform its financial system from dependence on the dollar and the euro to dependence on the renminbi.
As of December 2023, the renminbi accounts for more than a third of Russian trade agreements with foreign partners – from virtually zero before the full-scale invasion of Ukraine. Renminbi deposits in Russia stood at $68.7 billion in 2023, exceeding dollar holdings. According to According to Russian central bank data, renminbi-denominated loans increased nearly fourfold to $46.1 billion, thanks largely to the conversion of dollar and euro debt into renminbi.
Russia and China use local infrastructure to process and clear transactions. Following the 2014 sanctions, Russia established a domestic analogue of Swift, known as the Bank of Russia Financial Messaging System (SPFS), the use of which is now mandatory. China operates its own cross-border interbank payments system (Cips), which now includes around 30 Russian banks. While Cips can’t rival Swift in volume, the war in Ukraine is fueling its expansion. Daily Transactions supposedly increased by 50 percent in 2022, and then another 25 percent in the first three quarters of 2023. Cips doesn’t just process payments between China and Russia. In April 2023, for example, Bangladesh used it to pay Russia’s atomic energy agency in renminbi for work on a nuclear power plant.
But this alone will not protect Chinese banks from sanctions if Washington discovers any prohibited transactions. The next step for Moscow and Beijing will therefore be the creation of sophisticated infrastructures to clear the most sensitive payments. This is unlikely to include any major Chinese banks integrated into the global financial system, but some of its 4,500 regional banks already have correspondent relationships with Russian banks. A scheme to compensate for problem payments could include smaller banks that only transact in their national currencies and only use local infrastructure. Multiple shell companies are likely to be involved as intermediaries, including from Central Asian and Gulf countries. Of course, such transactions will be more expensive and take longer, but they will be much harder for the US to find and suppress.
For now, of course, such mechanisms can only be a patchwork solution. Sooner or later, they are likely to be detected by the eagle eyes of the US government. But by using the Russian economy as a giant sandbox, Chinese officials can perfect a financial infrastructure that can be used by other nations looking for an antidote to Washington’s weaponization of the dollar.