Russia and China to revive barter trade to dodge US sanctions

Reuters reported on Thursday, citing sources in the Russian trade and financial sector, that Russia and China may begin barter exchanges as early as this fall to bypass Western sanctions and the closely monitored US banking system during payments.

The issue of payments in Sino-Russian trade was one of Vladimir Putin's priorities during his May visit to Beijing. Although certain methods to circumvent Western sanctions imposed on banks were developed, Reuters noted that the problem remains unresolved.

One proposed method to make payments harder for the US to detect was to use small, regional Chinese banks. However, this did not prove to be an effective solution. Consequently, Russia and China are working on creating regulations to facilitate barter exchanges.

As Reuters explained, barter would allow for at least partial concealment of transactions from Western market regulators while reducing the risks associated with currency exchange rates.

According to agency sources, the first barter exchange between Chinese and Russian companies could occur as early as this fall. A senior manager at a central Russian bank confirmed in an interview with Reuters that such a transaction is planned but declined to provide details. Other sources mentioned that the barter exchange could involve Russian-exported metals in exchange for Chinese machinery.

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

At present, other solutions are not viable. Russia's central bank's SPFS financial information transfer system is not yet compatible with the Chinese equivalent system CIPS. Additionally, the plan to create a settlement system among BRICS countries (Brazil, Russia, India, China, and South Africa) is progressing very slowly and, according to Reuters sources, may not be ready until 2028.

Reuters reminds us that barter exchanges between China and Russia were used in the 1990s following the collapse of the Soviet Union.

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 adherence to regulations and its geographical location in Yiwu, one of the leading logistics hubs for Chinese exports to Russia.

The significant difficulties in conducting Sino-Russian payments result from extensive sanctions imposed on Russian financial institutions after Russia invaded Ukraine. Additionally, at the end of 2023, US President Joe Biden issued an executive order allowing sanctions to be imposed on financial institutions that support transactions aiding the Russian defense industry. Consequently, Chinese state-owned banks imposed restrictions on servicing Russian clients.