Putin’s trip to China may show US threats are wishful thinking

The writer is a fellow at the Carnegie Russia Eurasia Center in Berlin

Russian President Vladimir Putin is about to travel to China on his first foreign trip since securing another six years in the Kremlin. One of his main goals will be finding ways to minimise any disruption to the economic lifeline that China has given his embattled regime since the full-blown invasion of Ukraine. It is notable that during his cabinet reshuffle on Sunday, key officials for Sino-Russian relations remained in place. His new defence minister, Andrei Belousov, is an economist with deep ties to the Chinese leadership.

Since February 2022, Beijing has become the biggest market for Russian oil and gas, as well as a key source of imports. These range from innocent consumer goods to components that keep the military machine going. With the supply of Chinese dual-use goods helping the Kremlin to outproduce Ukraine and the west, leaving Ukrainian defenders facing a Russian firepower advantage, Washington is now trying to cut off that flow.

In December, the White House threatened to impose sanctions on any bank clearing payments for 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, these seem to have had some effect. Chinese exports to Russia dropped by 15.7 per cent in March and by 13.5 per cent in April compared with the same period last year.

Hopes that this will conclusively fix the problem, however, are wishful thinking. 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 brainstorm the options in private before quietly implementing them. He is expected to be accompanied by an experienced team from the central bank and finance ministry who are responsible for the Kremlin’s drive to de-dollarise the Russian financial system since 2014. Their bold moves enabled the country to withstand the initial shock of sanctions and then rapidly switch its financial system from dependency on the dollar and euro to dependency on the renminbi. 

By December 2023, the renminbi accounted for more than a third of settlements in Russian trade with foreign partners — from practically zero before the full-scale invasion of Ukraine. Renminbi deposits in Russia stood at $68.7bn in 2023, exceeding dollar holdings. According to Russian central bank data, renminbi-denominated lending has surged nearly fourfold to $46.1bn, thanks largely to the conversion of debt from dollars and euros to renminbi.

Russia and China use local infrastructure for proceeding and clearing transactions. Following sanctions in 2014, Russia established a domestic analogue to Swift, known as the financial messaging system of the Bank of Russia (SPFS), whose use is now mandatory. China operates its own cross-border interbank payment system (Cips), which now includes about 30 Russian banks. While Cips can’t rival Swift in volume, the war in Ukraine is fuelling its expansion. Daily transactions reportedly increased by 50 per cent in 2022, and then by another 25 per cent 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 shield Chinese banks from sanctions should Washington discover any forbidden transactions. The next step for Moscow and Beijing, therefore, will be the creation of sophisticated infrastructure for clearing the most sensitive payments. This is unlikely to include any major Chinese bank integrated into the global financial system but some of its 4,500 regional banks already have correspondent relationships with Russian banks. A scheme for clearing problematic payments could include smaller banks that only conduct transactions in their national currencies and use only local infrastructure. The involvement of multiple shell companies as intermediaries, including from countries in central Asia and the Gulf, is likely. Of course, such transactions will be costlier and take more time, but they will be much harder for the US to find and clamp down on.

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, the Chinese authorities can fine-tune a financial infrastructure that can be used by other nations seeking an antidote to Washington’s weaponisation of the greenback.