China’s recent move to curb financial activities with Russia illustrates the difficult balancing act it faces between relations with Moscow and western sanctions.

Russia has long been seen as a natural ally to China – both geopolitically and ideologically – but the latest escalation by the west following the invasion of Ukraine is putting the relationship to the test.

Western nations have announced sanctions, most notably a ban of select Russian banks from SWIFT and restrictions against the Russian central bank to spend its approximately $630 billion in international currency reserves. 

Chinese Response

According to Beijing, «China always opposes any illegal unilateral sanctions», adding that U.S. actions were «raising tensions, creating panic and even playing up the schedule of war».

«Have they solved the problem? Is the world better off because of U.S. sanctions?» questioned Chinese spokesperson Hua Chunying, who underlined dialogue and negotiation as a better approach. 

«Will Ukraine's problems be resolved automatically by the imposition of U.S. sanctions against Russia? Will Europe's security be more secure as a result of U.S. sanctions against Russia?»

China, alongside India and the United Arab Emirates, was among the three UN Security Council members to abstain from voting in favor of deploring the military invasion. Russia used its veto power against the remaining 11 members that voted in favor.

SOE Moves

Interestingly, at least two state-owned Chinese banks have made moves that are aligned with the sanctions.  

According to a «Bloomberg» report citing unnamed sources, ICBC’s offshore units have stopped issuing dollar-denominated letters of credit for the purchase of Russian commodity exports.

Fellow financial giant Bank of China's Singapore unit has also stopped financing deals involving Russian oil and Russian companies, according to a separate report by «Reuters».

Sanction History

Although the bank curbs could reportedly be temporary, China has a history of compliance with dollar-related sanctions even while publicly opposing them.

In 2020, multiple Chinese lenders, including Bank of China, CCB and China Merchants Bank, made varying moves demonstrating caution when faced with U.S. sanctions against 11 individuals over the enactment of the national security law in Hong Kong.

«The U.S. Government's claim that the imposition of the so-called 'sanctions' was in response to the enactment of the National Security Law in Hong Kong is a lame excuse that could hardly stand up to challenge,» said the Hong Kong government at the time, calling the sanctions «shameless and despicable».

«It should be obvious to and resented by many people, locally and around the world, that the U.S. acts are displaying double standards and hypocrisy, let alone blatantly breaching international laws and basic norms governing international relations.»

«Not Coming to the Rescue»

In fact, the latest moves by Chinese banks have even emboldened U.S. officials to publicly challenge the China-Russia relationship. 

According to a senior Biden administration official, reports of the Chinese bank curbs against financing the purchase of physical commodities from Russia «suggest that, much like has been the pattern for years and years, China has tended to respect the force of U.S. sanctions».

«The latest signs suggest that China's not coming to the rescue,» the official told media after announcing western nations’ agreement to impose financial sanctions against Russia.

$1.6 Trillion Risk

More than just risking soft power by supporting Russian efforts to bypass sanctions, China faces the real risk of economic loss – Chinese trade with the U.S. and EU totals $1.6 trillion, more than ten-fold of the $146.9 billion in trade with Russia last year. 

And this could also create additional headwinds for China’s ongoing efforts to open up its $45 trillion financial industry to foreign institutions that include the likes of Wall Street behemoths like J.P. Morgan, Goldman Sachs, Deutsche Bank and more.

«It really would be an unfortunate signal for China's vision of the world,» the Biden administration added on Chinese efforts to help Russia evade sanctions. «It would do profound damage to its reputation in Europe, but really across the world.»