Russian efforts to bypass Western sanctions are making progress through China and India, two of the three UN Security Council Members that abstained from voting to deplore the invasion of Ukraine last month.

As expected, Russia is rapidly making efforts to find alternative payment methods to bypass Western sanctions. 

Last week, Russian producer Surgutneftegaz had started allowing Chinese buyers to receive oil without providing letters of credit (LC) – a bank-backed guarantee that allows for payment within 30 days – according to a «Reuters» report citing unnamed sources.

Chinese companies are using open accounts that allow deferred payment for purchased goods within three days after the cargo is loaded. 

The solution is focused on Chinese buyers of ESPO Blend crude and more arrangements are also reportedly being worked out with buyers of Russian Urals crude, the report added.

Chinese Banks

At $79.3 billion in 2021, China is Russia’s largest export market on top of an existing strategic partnership.  

Although larger Chinese banks are is reportedly reluctant to risk challenging sanctions, workarounds are being explored such as the passing on of business to smaller local lenders without a global presence. 

Earlier this month, hundreds of Russian firms were reportedly rushing to a Chinese state bank’s Moscow-based branch to open new accounts.

Rise of the Yuan?

Coupled with years of de-dollarization efforts, Moscow has been signaling greater willingness for more adoption of the yuan. 

«We have part of our gold and foreign exchange reserves in the Chinese currency, in yuan. And we see what pressure is being exerted by Western countries on China in order to limit mutual trade with China. Of course, there is pressure to limit access to those reserves,» said Finance Minister Anton Siluanov, adding that Western sanctions have frozen nearly half of Russia's gold and foreign currency reserves.

«But I think that our partnership with China will still allow us to maintain the cooperation that we have achieved, and not only maintain, but also increase it in an environment where Western markets are closing.»

Worries in Washington

Although initial responses from mainland banks – ICBC and Bank of China reportedly curbed Russian financing last month following the invasion – gave Washington sufficient confidence to publicly suggest that China was «not coming to the rescue», recent developments have led U.S. officials to change their tone. 

«We are communicating directly, privately to Beijing, that there will absolutely be consequences for large-scale sanctions, evasion efforts or support to Russia to backfill them,» said U.S. National Security Adviser Jake Sullivan in an interview with «CNN».

«We will not allow that to go forward and allow there to be a lifeline to Russia from these economic sanctions from any country, anywhere in the world.»

Rupee-Ruble Payment

And China is not the only contender with India also seeking an alternative payment system with Russia, particularly to secure critical imports like fertilizer as well as clear unpaid receivables for exports that have totaled $400 million.

According to a report by «Hindustan» citing an unnamed official, a top inter-ministerial panel made up of representatives from various ministries and the Reserve Bank of India have been formed to review the economic impact of the sanctions and explore a rupee-ruble bilateral payment system with an eye on smaller Indian banks with minimal exposure to dollar or euro transactions.  

«Official talks with Russians will be needed to set up an alternative payment mechanism but the government will be given various options after a comprehensive review of the sanctions,» said the anonymous official.

A similar payment system has previously been used by India to pay for oil imports from Iran when the Middle Eastern country also faced Western sanctions with UCO Bank established as the main payment gateway.