China State Banks Restrict Financing for Russian Commodities

(Bloomberg) -- At least two of China’s largest state-owned banks are restricting financing for purchases of Russian commodities, underscoring the limits of Beijing’s pledge to maintain economic ties with one of its most important strategic partners in the face of sanctions by the U.S. and its allies.

Industrial & Commercial Bank of China Ltd.’s offshore units stopped issuing U.S. dollar-denominated letters of credit for purchases of physical Russian commodities ready for export, two people familiar with the matter said. Yuan-denominated letters of credit are still available for some clients, subject to approvals from senior executives, the people said, asking not to be identified discussing private information.

The move followed Russia’s invasion of Ukraine, which triggered a wave of sanctions from countries including the U.S., the U.K. and Japan and stoked speculation that more may follow. Because commodity-linked letters of credit are issued so frequently, they would be among the first transactions impacted by the threat of sanctions.

Bank of China Ltd. has also curbed financing for Russian commodities based on its own risk assessment, another person said. The lender has yet to receive explicit guidance on Russia from Chinese regulators, two people said.

The Chinese banks’ response could be temporary, especially given that Western sanctions have so far spared Russia’s energy sector. It’s unclear whether Chinese banks have pulled back from other forms of financing for Russian companies and individuals, and their policies could change. 

The curbs highlight the difficult balancing act facing China’s biggest financial institutions and the nation’s president, Xi Jinping. While Russia is a major energy supplier to China and the countries often find themselves aligned in geopolitical disputes with the U.S., Russia’s economic weight pales in comparison to Western nations that buy many of China’s exports and control its access to the dollar-dominated international financial system. 

China’s four largest banks have complied with previous U.S. sanctions against Iran, North Korea and even top officials in Hong Kong because they need access to the U.S. dollar clearing system, a person familiar with the matter said. In a phone call with Vladimir Putin on Friday, Xi urged the Russian leader to negotiate with Ukraine to defuse tensions.

“Chinese financial institutions take sanctions compliance seriously,” said Ben Kostrzewa, foreign legal consultant at Hogan Lovells in Hong Kong, who formerly handled U.S.-China disputes and negotiations at the Office of the U.S. Trade Representative. “They don’t want to be sanctioned themselves, they can’t lose access to U.S. dollar transactions, so they are going to have to think about it very seriously -- whatever the geopolitical impact might be.”

ICBC, Bank of China and the China Banking and Insurance Regulatory Commission didn’t immediately respond to requests for comment.

With international lenders including ING Groep NV and Rabobank also imposing restrictions on commodity-trade finance linked to Russia, demand for the nation’s resource exports could dwindle. Chinese state-owned coal importers are unable to get credit lines from banks in Singapore for shipments from Russia, people familiar with the matter said.

U.S. sanctions put China’s state-owned financial institutions in a tough spot because many have established close ties with Russia over the past decade. 

ICBC’s Moscow branch alone had close to $1 billion of assets by the end of 2020 and offered an extensive range of yuan-denominated services, including deposits, lending, cross-border settlement and trade finance. Bank of China, Agricultural Bank of China Ltd. and China Construction Bank Corp. all have operations in Russia.

China’s largest policy banks -- China Development Bank and Export-Import Bank of China -- have provided tens of billions of dollars of credit to Russia as part of Xi’s Belt-and-Road Initiative, funding everything from infrastructure to oil and gas. 

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With assistance from Bloomberg