A financial lifeline?

As the global chokehold on Russia tightens, focus is shifting to whether China will provide a financial lifeline.

There are a few avenues should Beijing decide to buck the American-led efforts to isolate Moscow, which we detail here.

• The People’s Bank of China has a multi-billion dollar currency swap with Russia’s central bank, allowing the two nations to provide liquidity to businesses so they can continue trading, as Bloomberg reports here.
• Then there’s yuan assets held in Russia’s foreign exchange reserves. About 13% of the reserves, or an estimated $77 billion, were in Chinese assets as of June 2021, according to the Bank of Russia. Selling those holdings would give Moscow much-needed liquidity.
• China has also signed Russian banks onto its homegrown payments settlement system, seen as an alternative to the SWIFT network, which many Russian lenders will be banned from using.

It’s unclear whether that support will be forthcoming though, with the PBOC yet to disclose how it will respond to the Russia sanctions.

China is treading cautiously for now, with two major state-owned banks restricting financing for purchasing Russian commodities.

As for China’s smaller banks, there could be room to help Russia if history is any guide. China could use an institution similar to the Bank of Kunlun, a small and unlisted state-owned lender that continued to finance payments to Iran even after Washington shut the bank out of the dollar market. Read Lisa Du and Tom Hancock‘s story here.

While continuing to deal with Russian entities sanctioned by the U.S. and EU would not be illegal under Chinese or international law — China has not imposed sanctions on Russia and neither has the United Nations — banks run the risk of secondary sanctions if they do business with sanctioned entities, which can cut off their ties with U.S. and EU investors.

For now, China’s stance is uncertain, with President Xi Jinping calling for negotiations over Russia’s invasion of Ukraine.

If it does decide to aid its strategic partner, Beijing’s dilemma will be how to do so without breaking Western sanctions and facing global blowback of its own.

— Malcolm Scott

Source: Bloomberg