Putin's China trip could show US threats are just wishful thinking

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The writer is a member of the Carnegie Russia Eurasia Center in Berlin.

Russian President Vladimir Putin is set to visit China for his first foreign trip since spending another six years in the Kremlin. One of his main goals will be to find ways to minimize any disruption to the economic lifeline that China has given its embattled regime since the all-out invasion of Ukraine. It should be noted that during Sunday's cabinet reshuffle, the main people responsible for Sino-Russian relations remained in place. Its new defense minister, Andrei Belousov, is an economist with close ties to Chinese leaders.

Since February 2022, Beijing has become the largest market for Russian oil and gas, as well as a key source of imports. This ranges from innocent consumer goods to the components that run the military machine. While the supply of Chinese dual-use goods helps the Kremlin outcompete Ukraine and the West, leaving Ukraine's defenders facing an advantage in Russian firepower, Washington is now trying to cut off that flow.

In December, the White House threatened to impose sanctions on any bank payments to the Russian war machine. Earlier this year, US Treasury Secretary Janet Yellen and Secretary of State Antony Blinken visited China and outlined threats to Chinese leaders and financial institutions. For now, these measures appear to have had some effect. Chinese exports to Russia fell 15.7 percent to 13.5 percent in April compared to the same period last year.

Hoping that this will permanently solve the problem is just wishful thinking, however. Over the past two years, the Russian and Chinese governments have demonstrated a remarkable ability to adapt to U.S. restrictions. Putin's visit offers a new opportunity to privately consider options before quietly implementing them. He is expected to be accompanied by an experienced team from the central bank and finance ministry, responsible for the Kremlin's campaign to dedollarize Russia's financial system since 2014. Their bold steps allowed the country to withstand the initial shock of sanctions, then quickly transition its financial system from its dependence on the dollar and the euro to that of the renminbi.

In December 2023, the renminbi accounted for more than a third of settlements in Russian trade with foreign partners, while it was practically zero before the large-scale invasion of Ukraine. Renminbi deposits in Russia stood at $68.7 billion in 2023, surpassing dollar holdings. According to Russian central bank data, renminbi-denominated loans almost quadrupled to $46.1 billion, largely driven by the conversion of dollar and euro debt into renminbi.

Russia and China use local infrastructure to process and clear transactions. Following sanctions in 2014, Russia established a domestic analogue of Swift, known as the Bank of Russia Financial Messaging System (SPFS), which is now mandatory for use. China operates its own cross-border interbank payment system (Cips), which now includes around 30 Russian banks. Although Cips can't compete with Swift in terms of volume, the war in Ukraine is fueling its expansion. Daily transactions are estimated to have increased by 50% in 2022, then by another 25% 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 the Russian Atomic Energy Agency in renminbi for work on a nuclear power plant.

But this will not be enough to protect Chinese banks from sanctions if Washington discovers prohibited transactions. The next step for Moscow and Beijing will therefore be the creation of sophisticated infrastructures to compensate for the most sensitive payments. This is unlikely to include a 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 system for clearing problematic payments could include smaller banks that only transact in their national currency and use only local infrastructure. The involvement of several shell companies as intermediaries, particularly from Central Asian and Gulf countries, is likely. Of course, such transactions will be more expensive and take longer, but they will be much more difficult for the United States to find and suppress.

For now, of course, such mechanisms can only constitute a patchwork solution. Sooner or later, they will likely be detected by the eagle eyes of the US government. But by using the Russian economy as a giant sandbox, Chinese authorities can refine a financial infrastructure that can be used by other countries seeking an antidote to Washington's weaponization of the greenback.

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