Russia and China revive barter trade to dodge Western sanctions

Reuters reported on Thursday, citing sources in the Russian trade and financial sectors, that Russia and China may begin barter exchanges by autumn to circumvent Western sanctions and the banking system closely monitored by the USA.

Vladimir Putin prioritised payments in Chinese-Russian trade during his May visit to Beijing. Although some methods of bypassing Western sanctions on banks have been developed, Reuters noted that the problem remains unresolved.

The proposed method to make it more difficult for the USA to detect payments was to use small, regional Chinese banks. However, this does not constitute an effective solution. Therefore, Russia and China are working on creating regulations governing barter exchanges.

As Reuters explained, barter would at least partially conceal transactions from Western market regulators while simultaneously limiting the risk associated with currency exchange rates.

According to the agency's sources, the first barter exchange between Chinese and Russian companies could take place as early as autumn. In an interview with Reuters, a high-ranking manager at a major Russian bank confirmed that such a transaction is planned but refused to provide details. Other sources stated that the barter exchange might involve Russian export metals in exchange for Chinese machinery.

In February of this year, the Russian Ministry of Economy published a document advising Russian companies on how to conduct such exchanges, calculate costs, and account for the transactions. The ministry's guidelines also stated that barter is an effective way to bypass Western sanctions.

For now, other solutions are not feasible. The Russian Central Bank's financial information transfer system, SPFS, is not yet compatible with the Chinese equivalent, CIPS. Additionally, the plan to create a settlement system between the BRICS countries (Brazil, Russia, India, China, and South Africa) is progressing very slowly and, according to Reuters' sources, may only be ready in 2028.

The agency reminds that barter exchange between China and Russia was used in the years leading up to and following the fall of the Soviet Union in the 1990s.

Chinese Chouzhou Commercial Bank (CZCB) halted transactions with Russia in February 2024. Previously, it was one of the main settlement channels for Russian importers due to its relatively "lenient compliance" and geographical location—its headquarters are in Yiwu, one of the main logistics hubs for Chinese exports to Russia.

The significant difficulties in conducting Chinese-Russian payments result from the broad sanctions imposed on Russian financial institutions following Russia's invasion of Ukraine. Additionally, at the end of 2023, US President Joe Biden issued an executive order allowing sanctions on financial institutions servicing transactions supporting the Russian defence industry. Consequently, Chinese state banks have introduced restrictions on servicing Russian clients.