Some Chinese banks are so fearful of sanctions that they're returning payments for goods that have reached Russia, report says

• Some Chinese banks are returning payments for goods that have reached Russian shores, a report says.
• The US recently imposed new restrictions on 400 entities supporting Russia's war in Ukraine.
• Chinese exporters are said to be requiring pre-payment for goods going to Russia.

The US's tightening sanctions against those aiding Russia's war efforts are really spooking some Chinese banks.

Not only are they refusing to process trade transactions with Russia, but some are even returning payments for goods that have been shipped, the pro-Kremlin Izvestia news outlet reported Friday.

Ekaterina Kizevich, the CEO of Atvira, a Russian foreign-trade consultancy, told Izvestia that these Chinese banks were returning the money if they couldn't confirm whether the goods fell under trade restrictions.

Kizevich added that the Chinese banks were so fixated on compliance that some payments had been returned even after goods had reached Russian shores.

The news came a week after the US Treasury and State Department announced fresh restrictions against 400 individuals and entities for supporting Russia's war efforts in Ukraine. They include companies in China and Hong Kong.

China has said it's "strongly dissatisfied" and "firmly opposed" to the new restrictions.

Trade snarls add to logistics costs

Even so, Chinese banks would rather be safe than sorry when it comes to running afoul of US secondary sanctions.

It's unclear how Chinese exporters and their Russian clients are resolving issues of bounced and returned payments if goods have already been shipped and delivered. But Kizevich told Izvestia that imported goods were spending more time at ports and warehouses, adding to higher logistics costs.

Nikolai Dunaev, the vice president of Opora Russia, an organization for small and medium businesses, told Izvestia that now, Chinese exporters would only ship goods to new customers in Russia after payment had been confirmed. Pre-paying for imports typically increases risks and affects cash flow for buyers.

But Russian businesses have bigger problems; Dunaev told the newspaper that some Chinese banks were so fearful of restrictions that they were, at times, not processing payments for non-sanctioned goods. Izvestia reported that the banks were also paying more attention to payments from Russia going through third countries.

The Kremlin has acknowledged the business community's difficulties surrounding payment transactions with China.

Dmitry Peskov, a Kremlin spokesperson, said Thursday that Moscow and Beijing were working on the payment issues affecting trade, according to the state news agency TASS.

"Trade and economic relations are copious. With such volumes and with such an unfriendly environment, it's impossible to avoid some problematic situations," Peskov said.

Russia's payment whack-a-mole

Since the invasion of Ukraine, Russia and its trade partners have skirted sanctions by using smaller banks and other payment modes or non-US-dollar currencies to circumvent the West's ban of some Russian banks from the widely-used SWIFT messaging system.

But the doors have been closing for these workarounds since December, when the US approved secondary sanctions targeting financial institutions that were helping Russia.

Russia is now rushing to set up alternative payment systems, including crypto, to facilitate trade.

Russia and China were even planning to revive the age-old practice of barter trade to get around Western sanctions, Reuters reported earlier this month.