MOSCOW (Reuters) -Major Russian banks have set up a netting payments system dubbed “The China Track” for transactions with China, aiming to reduce their visibility to Western regulators and mitigate the risk of secondary sanctions, banking sources told Reuters.
Russia’s trade with China hit a record $245 billion last year despite payment problems and commissions running as high as 12%, as Chinese banks had grown too cautious to do business with Russia and jeopardise their ties with the United States.
The issue had become so important that Russian President Vladimir Putin and China’s President Xi Jinping discussed it during Putin’s visit to China in May 2024, which was aimed at cementing the two countries’ ‘no limits’ partnership.
Xi is set to take part in Russia’s Victory Day parade on May 9, but his visit is now taking place amid China’s trade war with the United States, making the booming trade with Russia and other non-Western nations more important.
“I do not rule out that the Chinese partners will no longer be afraid of secondary sanctions,” said Alexander Shokhin, the head of the powerful RSPP business lobby group, who takes part in trade negotiations with China.
The new system has been set up by major sanctioned banks and involves a web of intermediaries registered in countries that Russia considers friendly. The system has been in place for some time and has not yet suffered any major setbacks.
Each bank runs several verified payments agents, some of whom handle payments for exports, and some for imports. All payments are then netted centrally at the bank with all the counterparties involved receiving their money.
The banks settle trade in both directions, said market sources, who spoke on condition of anonymity due to the sensitivity of the issue.
SECURE FROM BEING BLOCKED
The banks provide guarantees for payments’ settlement as well as financial instruments insuring against a possible default of a payment agent or a counterparty. The system does not use the SWIFT messaging system or accounts in Western banks.
“We had to structure financial flows through friendly jurisdictions to secure these payments from being blocked,” one market source said, stressing that netting has become the cheapest way for settling trade with China.
The sources declined to name the banks, saying they do not want to draw additional attention to their operations because of sanctions but stressed that all the banks involved rank among Russia’s top 20.
China propped up Russia economically in 2022 when the country was faced with unprecedented Western sanctions over its military action in Ukraine, providing consumer goods which replaced those offered by Western companies.
