US targets Chinese banks supporting the military effort in Russia

Tue Apr 23 2024
Gil Ecker (245 articles)
US targets Chinese banks supporting the military effort in Russia

According to sources familiar with the matter, the United States is considering imposing sanctions that could potentially isolate certain Chinese banks from the global financial system. This move aims to provide diplomatic leverage to Washington’s top envoy, with the hope of discouraging Beijing’s financial support for Russia’s military production.

As Secretary of State Antony Blinken prepares to visit Beijing, the effectiveness of the U.S.’s financial coercion in disrupting the growing trade between Beijing and Moscow is being questioned. This trade has enabled the Kremlin to rebuild its military, which suffered significant damage during the prolonged conflict in Ukraine.

China has taken note of Western cautions against supplying arms to Russia throughout the conflict. However, following Blinken’s visit to Beijing last year, China’s exports of dual-use commercial goods have seen a significant increase. According to U.S. officials, China’s assistance has enabled Moscow to restore its military industrial capacity, as it has become the main provider of circuitry, aircraft parts, machines, and machine tools.

Concerns are rising in the West about the potential for Russia to emerge victorious in a war of attrition against Ukraine, especially if allies fail to ramp up their own industrial capabilities to keep pace with Russian production.

Officials such as Blinken have been raising concerns among Western allies, as demonstrated by their recent discussions at a meeting of the Group of Seven industrialized nations in Capri, Italy.

However, as he travels to China, officials are relying on the potential consequences of Chinese banks losing access to the dollar and the potential disruption of trade ties with Europe to convince Beijing to change its approach. In the world of commerce, banks play a crucial role as intermediaries for commercial exports to Russia. They facilitate payments and extend credit to client companies for their trade transactions.

“China cannot have it both ways,” Blinken stated during his speech in Capri. “Claiming to desire positive and amicable relations with European countries while simultaneously contributing to the largest threat to European security since the conclusion of the Cold War is contradictory.”

U.S. officials suggest that imposing sanctions on banks could be considered as a potential course of action if diplomatic efforts do not succeed in convincing Beijing to reduce its exports. In recent weeks, U.S. officials have been increasing pressure on Beijing through private meetings and calls. They have been cautioning that Washington is prepared to take action against Chinese financial institutions that are involved in trade of goods with dual-use capabilities.

According to Treasury Secretary Janet Yellen, banks that engage in substantial transactions involving military or dual-use goods and Russia’s defense industrial base run the risk of facing U.S. sanctions. Yellen made this statement during her recent meetings with counterparts in Beijing.

Officials express optimism that the collective Western diplomatic pressure will prevent any action that may jeopardize the delicate detente between the two powers. When banks are denied access to the dollar, which is the most widely used currency in global trade, the consequences go far beyond typical sanctions that focus on individuals and companies. As a result, this measure is usually considered a last resort. Sanctions can have a significant impact on banks, leading to their failure and affecting their entire customer and client base. This poses a particular risk for China, especially as the country deals with increasing credit problems.

In the past, though, the mere threat of targeting banks has had short-lived results. In December, President Biden issued an executive order granting the Treasury Department the power to impose sanctions on banks that provide assistance to Russia’s military-industrial complex.

That resulted in supply chain congestion in China-According to Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center think tank and a former employee of Russia’s central bank, major Chinese banks have withdrawn from their involvement in facilitating trade transactions with Russia.

However, she mentioned that these banks have been gradually replaced by lesser-known regional Chinese banks that have limited involvement in the dollar-denominated economy. As a result, they have less to worry about when it comes to U.S. sanctions. “Payment chains are gradually being reconstructed,” Prokopenko stated. Both Russians and Chinese are consistently adjusting to the ever-changing circumstances.

According to a recent analysis published by the Center for Strategic and International Studies, a Washington-based think tank, there was a significant increase in the trade of essential dual-use goods for Russia’s military following Xi’s meeting with Putin in March last year. According to CSIS, there has been a significant increase in the number of shipments of dual-use goods, such as helicopter parts, navigational equipment, and precision machinery for weapons and aircraft. The monthly shipments have surged from just a few thousand to nearly 30,000.

According to Max Bergmann, a senior fellow at CSIS, the Kremlin has been able to enhance its weapons production, encompassing armor, artillery, missiles, and drones. This has allowed them to effectively defend against Ukraine’s 2023 counteroffensive.

Initially, Xi seemed to take into consideration the concerns raised by the West about sending military equipment to Russia. However, the Chinese have since discovered alternative methods to bypass these restrictions. A senior European diplomat based in Washington noted that the Chinese do not supply anything resembling a weapon. “The components we are discussing – chips, machinery, tools – are the very components that are used in the creation of a weapon.”

According to a diplomat, the trade is not only a strategic investment for Putin, but also for Xi, which adds to the challenge the U.S. is facing. The two individuals, who have had numerous meetings, dedicated a significant amount of time to establishing the foundation for stronger trade relations prior to the invasion of Ukraine. This involved promoting increased trade in ruble and yuan as a means of protecting their economies from the impact of Western sanctions, according to the official.

According to the diplomat, it is believed that Putin may not have initiated the war without prior knowledge of technological support from the Chinese.

According to officials and analysts, the shipments from China have played a crucial role in rebuilding sections of the Russian military that were damaged and destroyed during the initial year of its invasion in 2022. The trade has also helped alleviate a labor shortage that Western officials were concerned would negatively impact the economy. However, the Chinese supply lines will also play a crucial role in ensuring the resilience of Russia’s military production in the upcoming years, especially as it embarks on offensives to gain control over additional territories in Ukraine.

China’s foreign ministry criticizes the sanctions imposed on its firms, including those related to dual-use shipments, as acts of economic coercion, unilateralism, and bullying.

China remains committed to protecting the legitimate rights and interests of Chinese companies, as stated by the ministry’s spokesperson during a recent press conference.

Washington’s European allies have been cautious in implementing punitive measures against a significant trade partner and financier, choosing to sanction only a small number of the many firms listed by the U.S.

During his recent meetings in Beijing, Olaf Scholz, the chancellor of Germany, discussed China’s decision not to sell weapons to Russia. Germany and other key European allies were content with the no-arms policy as sufficient.

Now there is a push to make adjustments, partly due to the significant support from China, according to a former senior U.S. national security official. It is hoped that we can strongly address China’s actions to the Europeans.

After his meetings, Scholz hinted at a potential shift in policy, but he chose not to provide further details when questioned by reporters. “The consideration of dual-use should not be overlooked,” he remarked.

Europe’s financial and trade ties with China give it significant diplomatic influence over Beijing, surpassing that of Washington, according to the U.S.

According to Maria Snegovaya, a senior fellow at CSIS and one of the chief authors of its recent report, the West has significant untapped potential for leverage, particularly considering the dominance of the dollar and euro in the financial system. That could be a potentially effective approach to address the issue.

Gil Ecker

Gil Ecker

Gil Ecker is Charting & Technical Analyst. He has more than 10 years experience of Global Stock Markets.