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Yves here. BRICS promoters may see plans to boost trade between China as a sign of success for both countries escaping US sanctions. Actually, it’s the opposite. Bartering is a practice usually reserved for countries that have not had sufficient success in avoiding sanctions by other means. It’s efficient and kind. You will see in the article below that Russia is trying to put many procedures in place. That’s probably to prevent cheating more than a little.
Now it is possible that this trade is primarily intended as a backup method and is not expected to represent much volume even if all the kinks are worked out. But if not, say the US/EU sanctions are effective enough to impose additional costs and suffering on Russia’s allies.
Remember that the US is frustrated with the extent to which Russia is able to continue exporting without which the US and Europe intend to cripple the sanctions. The US tried to block some of the channels used by Russian consumers. Another included secondary sanctions, such as sanctioning groups in third countries, such as Chinese banks, that handled payments related to Russia. That didn’t stop all Chinese banks from taking on Russia, but it did lead to major banks pulling back. It seems unlikely that a small fry can fully understand the loss of this position. From Business Insider on September 1:
China’s state-owned banks have halted transactions with Russia for fear of being hit by US sanctions, but smaller financial institutions are taking over, Reuters reported on Friday.
Some small local Chinese banks are still processing payments with Russia because they have no international business to worry about.
However, they lack the necessary IT systems and personnel to manage cross-border transactions and even need to send paper copies of documents to and from Russia for stamping and signature, an anonymous banking source told the news agency….
Despite the difficulties, Russia – a major commodity exporter – is still receiving payments for its sales of raw materials, such as oil and grain, one banking source told Reuters. Its payments for the export of Chinese technology are also still going through.
However, small Russian companies – such as those that trade in consumer goods – are not so lucky. China’s biggest banks are cutting off transactions with Russia “en masse,” and billions of yuan in trade are in limbo – hitting small firms hard, anonymous sources close to the government told Reuters.
The Kremlin has acknowledged issues with trade payments and said it is working with China on solutions.
The Reuters story followed recent news from Russian media about the problems local companies have had with Chinese banks….
But banks linked to Russia have been shutting down their business with the country since December, when the US agreed second sanction directed the financial institutions that helped Russia.
Moscow is now in a hurry to set up other payment systemsincluding cryptoto facilitate trade.
The Business Insider piece also reveals that Russia and China had to consider trade.
A 2001 story in the Washington Post about notorious stockbroker/tax evader Marc Rich provides insight into how he profited by organizing large-scale foreign exchange operations in sanctioned countries such as South Africa, Iran, and Libya. Admittedly, this wasn’t Rich’s only lucrative career. Some quotes from the story to give a flavor:
The list of countries that Rich traded with reads like a collection of corrupt countries: Iran during the hostage crisis, South Africa during apartheid, Slobodan Milosevic’s Yugoslavia, North Korea, Moammar Gaddafi’s Libya, the Soviet Union under Leonid Brezhnev….
But it was in the former Soviet Union that he made his biggest mark. According to traders familiar with his work, he worked during the Soviet era, negotiating with officials at Raznoimport, the state-run commodity trade, and selling Soviet zinc, the most valuable metal. After the collapse of the Soviet Union in 1991, these relationships helped Rich become the single most important Western businessman in Russia.
“Marc Rich was way ahead of the big international companies,” said Vladimir Kvint, a leading expert on Soviet and Russian business practices at Fordham University in New York. “He was one of the founders of trade with the former Soviet Union. He bought oil, aluminum, cobalt at domestic Russian prices, and then sold them at international prices, which were usually 10 to 15 times higher.”
Many in the pro-BRICS/anti-globalist commentariat have high hopes for a new currency or payment system to emerge from the BRICS summit at the end of October. I wouldn’t be so optimistic. Multi-party negotiations are complicated and paying pipes involves a lot of nerdy details. An idea that seems to be going on and possible in the not-too-distant future is a bilateral trade messaging system. But that will not solve the second bank sanctions problem.
Originally published on Reuters; Cross posted to InfoBRICS
Russia and China may begin implementing bilateral trade agreements, three trade and payments sources told Reuters, with two expected agreements involving agriculture as soon as this fall, as Moscow and Beijing try to reduce the use of banks chartered by the United States.
Bilateral payment delays were high on the agenda when President Vladimir Putin visited China in May and although workarounds have emerged, such as using small, regional Chinese banks whose operations are difficult for Washington to see, payment problems remain.
Trading on the exchange would allow Moscow and Beijing to avoid payment problems, reduce the visibility Western regulators have over their bilateral operations, and limit currency risk.
Russia is developing barter trade regulations and Russian sources Reuters spoke to are working on the assumption that China is doing the same. The sources, who asked not to be identified due to the non-public nature of the information, are all heavily involved in bilateral trade.
A senior manager at Russia’s central bank said the exchange plan is still being worked out, but declined to disclose details. Another source working on payments said trade with Russia was being discussed, which exports food to other countries. Russia’s industry and commerce ministry and China’s ministry of commerce did not respond to questions about the barter trade.
HISTORY OF BARTER
China and Russia have a history of trade agreements. In 2019, China agreed to trade approximately $150 million worth of palm oil from Malaysia in exchange for construction materials, natural resource products, and defense equipment.
In 2021, a Chinese company sent $2 million worth of auto parts to Iran for pistachios.
Trade deals between Moscow and Beijing were common before the fall of the Soviet Union and continued into the 1990s, but the deals now being discussed would be the first in nearly 30 years, the sources said.
“I remember in the early 1990s … there were trade agreements between China and Russia at that time,” said Kyle Shostak, vice chairman of the board at Qifa, a Sino-Russian company that seeks to ease trade tensions between China and Russia.
“Then, because of the development of the banking sector, all the business, all the trade between Russia and China changed completely to settling the banks.” Shostak said the Qifa platform will be ready to facilitate the exchange once the regulations are fully implemented.
Russia’s Ministry of Economy published a document in February advising Russian companies on how to conduct trade and identifying pitfalls to avoid.
This 15-page document includes a step-by-step guide to calculating costs and customs duties, explains the necessary accounting requirements and provides contract templates for different types of trade – bilateral, multilateral and tolling, where the factory is operated by a third party for example.
This article explains the best way to avoid foreign exchange and currency exchange.
Russia’s economy ministry did not respond to questions about the document or the planned trade deal with China.
Barter trade offers a way out of major payment problems for both licensed and public goods, a Russian government source said, lamenting that Putin’s trip to China did not improve prospects as expected.
“There are political issues that need to be resolved, but even though our boss has visited China, he has not arrived yet,” said this person.
A separate source in a Russian industrial company said that the exchange of steel from Russia with equipment from China was being discussed between the companies.
‘OPEN BOOK’
The transparency of traditional trade channels is an obstacle to China’s trade with Russia, as is Russia and China’s lack of a direct payment system, the sources said.
The global financial messaging system SWIFT remains an option for unauthorized banks, but it is “a global banking system that is completely transparent to our friends, among them, the Americans,” the payments intermediary told Reuters.
“They are looking forward to this open letter. Therefore, the less SWIFT is used for transactions between Russian and Chinese banks, the more peaceful it becomes.”
Russia’s Bank of Financial Messaging System (SPFS) and China’s CIPS payment platform are not yet fully connected.
“Today there is no IT-airlock that can connect these two systems, so the bridge is still SWIFT or remote banking services available in almost all banking software,” said the payments intermediary.
The Governor of the Central Bank of Russia Elvira Nabiullina has already spoken about the BRICS Bridge payment system, which will link the financial systems of the member countries.
Progress was slow. A Reuters source close to the project said the introduction of digital currency settlements using the bridge would not come before 2028.
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