President Vladimir Putin and Chinese Vice President Han Zheng meet in Harbin

Russia-China trade options have narrowed since the U.S. imposed sanctions last week on the only Russian bank branch in China, but President Vladimir Putin's Chinese visit last month has helped ensure the two countries have payment alternatives for now, three sources said.

Since Putin's visit, specially authorised banks have been set up in border regions which allow Russian firms to open non-resident accounts (NRA) with Chinese banks, a step that has become more important since VTB's Shanghai branch was targeted with sanctions, they told Reuters.

Trade between Russia and China ballooned to a record $240 billion in 2023. Maintaining the flow of income and goods, which is crucial to the Kremlin, depends on ensuring smooth payments.

The workaround, which involves smaller, regional banks that can for the time being fly below the U.S. sanctions radar, shows how Moscow and Beijing are having to take increasingly complex steps to ensure bilateral payments continue to be made but at the same time potentially exposing some Chinese financial firms to U.S. sanctions as they look to circumvent restrictions.

Using banks in border regions makes it easier for go-betweens working on behalf of Russian companies to flit between them. The scheme, involving small banks with limited or no business with countries which Russia considers unfriendly, also reduces the potential fallout for China.

However, the window for them to carry out payments for Russian companies may be narrowing. A senior U.S. Treasury official said this month it is working to identify smaller banks with weaker compliance departments that are still helping to process transactions that aid Russia's military output.

Trade with Beijing has become more important to Moscow since it sent its army into Ukraine in February 2022. Russian banks were subsequently blocked from the SWIFT global payments system, while many Western countries and companies severed ties with Russia.

"After (Putin's) visit, banks have appeared in one of China's provinces that are opening NRA accounts for Russian companies on Chinese territory," said one banking source, who declined to disclose names due to sanctions risks.

Only a handful of banks, located near the border in the northeast, still work with Russia, a second banking source said.

"We are not even talking about ... large and medium-sized banks today," the person said. "None of them work with Russia. This is the problem that we must really recognise."

The People's Bank of China and China's banking regulator, the National Financial Regulatory Administration, did not respond to requests for comment.

After more Chinese firms were sanctioned by the U.S., many may have decided to stop any business with Russia and imports from China could drop, said Yevgeny Kogan, investment banker and professor at Russia's Higher School of Economics.

Sanctions on Russian bank subsidiaries in China also create issues, he added.

'FRIGHTENING'

VTB was already under sanctions, but the U.S. Treasury modified restrictions on previously targeted Russian banks to include foreign entities, including VTB's Shanghai branch, a step sources said would complicate payment flows.

"The branch of a Russian bank that we all love to use in China was included in the sanctions package," said a source in the payments market said, who expects even Chinese banks to stop all dealings with the branch as a result.

Prior to the latest sanctions, CEO Andrei Kostin said VTB was tripling staff in Shanghai to try and cut queues of clients trying to open accounts. Reuters has previously reported delays as long as six months.

"We do not comment on the activities of our foreign entities," VTB said.

When a Russian company buys or sells goods or services with a Chinese trading partner it needs to be able to receive or pay the cash through payments systems operated by banks.

Russia's largest private lender, Alfa Bank, has for months been working on opening two Chinese branches, in Shanghai and Beijing, but without success. That did not stop it touting its China credentials with a vast red inflated dragon adorning its stand at a St Petersburg economic forum this month.

"American sanctions are the most frightening, including for our Chinese partners," the payments markets source said. "As the Chinese say, they fear them like the tiger."

The threat of secondary sanctions, which could cut institutions off from dollar access, has spooked Chinese banks who do not want to lose access to global markets, the person said, even if there is lucrative trade to be done with Russia.

LIMITED RUSSIAN SWAY

For Russia, payment issues hurt export revenues, disrupt supply chains and raise import prices, the central bank has said, while its oil firms face months-long payment delays.

Compared to U.S. and EU markets, it has limited pull.

"No-one in China is ready to fall under secondary sanctions and lose the global market just because of Russia," the payments markets source said. "Neither manufacturing companies, nor financial structures, including banks."

The second banking source said non-sanctioned Russian banks were still acceptable to Chinese partners, but U.S. restrictions are a killer blow, with even specially authorised Chinese banks halting settlements.

Russian companies can now either open an NRA account with a Chinese bank or create a Chinese subsidiary and open accounts domestically, the person said.

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China's yuan is tumbling amid US sanctions and as central banks boost dollar holdings

• China's yuan is falling as holders eye the risk of western sanctions.

• The US Treasury threatened to impose secondary sanctions on nations aiding Russian trade.

• China has been a key trading partner of Russia since its invasion of Ukraine.

China's yuan is in the midst of a steep decline as holders of the currency eye the risk of US sanctions.

The value of the yuan slumped against Russia's ruble for the fifth day in a row on Wednesday, falling to a level of 11.51 rubles. That's the cheapest the yuan has been in about a year.

Central banks, meanwhile, are looking to dump the yuan while raising their holdings of the US dollar. Nearly 20% of central bank reserve managers said they planned on raising dollar holdings over the next one to two years, while 12% said they planned on reducing yuan holdings, according to a survey from the Official Monetary and Financial Institutions Forum.

Yuan holders are assessing the risk of Western trade restrictions on China after the US Treasury imposed secondary sanctions on countries and entities doing business with Russia's economy.

That puts China at particular risk, given that the nation become a key trading partner to Russia since Moscow first began its invasion of Ukraine in 2022. The two countries have embarked on a "no limits" economic partnership, which took their trade to a record $240 billion in 2023, according to data published by the Chinese government. They've also partnered on efforts with other BRICS states to phase out the use of the dollar, which has been nearly eliminated in China-Russia trade.

Lawmakers are reportedly already drafting sanctions to impose against Chinese banks, sources told The Wall Street Journal in April. If enforced, those sanctions could completely cut off some Chinese lenders from the global financial system, severely limiting the volume of trade and currency transactions.

China, for its part, has taken some steps to distance itself from Russia's economy. China's state-run banks are looking to restrict lending to Russian clients, due to fear of being targeted by US sanctions, people familiar with the matter told Bloomberg.

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