Legitimate Russian Businesses in China Unable to Establish Banking Facilities

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complementary-or-competitive-bannerLegitimate Russian businesses and investors in China are reporting difficulties in being able to open or operate their bank accounts in the country, apparently due to the effect US sanctions are having on the international business environment. Dezan Shira & Associates report that their Russian clients in Beijing and elsewhere in China are unable to access banking facilities, or establish accounts as Chinese banks are unwilling to operate them under threat of retaliatory punishments from the US. For the small number of Chinese banks that are prepared to offer services, the corresponding (clearing) bank is declining transactions.

The majority of international transfers are made via a banking system that favors US corresponding banks and permits the US to assess who is sending money where, an initiative originally intended to track monies used in terrorism or the drugs trade. It is now being utilized to assist with US trade policy, and has the ability to punish non-compliant banks by either imposing significant fines or blacklisting them from global trade.

International wire transfers often occur between banks that do not have an established financial relationship. When agreements are not in place between the bank sending a wire and the one receiving it, a correspondent bank must act as an intermediary. For example, a bank in Moscow that has received instructions to wire funds to a bank in China cannot wire funds directly without a working relationship with the receiving bank.

Most international wire transfers are executed through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. Knowing there is not a working relationship with the destination bank, the originating bank can search the SWIFT network for a correspondent bank that has arrangements with both banks.

Upon finding a correspondent bank having arrangements with both sides of the transfer, the originating bank sends the transferred funds to its nostro account held at the correspondent bank. The correspondent bank deducts its transfer fee, usually US$25 to US$75, and transfers the funds to the receiving bank in China. In transactions such as this, the correspondent bank adds value in two ways. It alleviates the need for the domestic bank to establish a physical presence abroad and saves the work of setting up direct arrangements with other financial institutions around the world.

Chris Devonshire-Ellis of Dezan Shira & Associates comments: “These measures are affecting decent, honest businesses that have no connection to Russia’s politics nor any disagreements with the US. Ordinary Russian investors and citizens are essentially being frozen out of the global trade and financing picture through the use of denial of banking services as Chinese banks do not wish to fall foul of US regulations. This goes completely against the American concepts of of free trade and globalization and is having a knock-on effect on honest businesses who wish to trade with honest Russians. Instead, the entire Russian business community is being impacted. That is borderline anti-Russian as a nation, not just the politicians and individuals the sanctions are supposed to be targeted at. Ordinary Russians are starting to feel they are being victimized by the US policy against them and I can understand why. Free trade is a cornerstone of American democracy and the Russians are being denied the ability to legitimately fund their investments overseas.”

The impact on Russia unless the situation can somehow be relaxed will be serious as it means Russian businesses will effectively be denied access to banking systems that run across global trade routes, as the US imposes corresponding banks on the majority of international transactions. None want to be fined or blacklisted by the US. That is leading to greater calls to find ways around this bottleneck, which is increasingly being used to facilitate US interests in trade policy rather than its original purpose of combating money laundering, the drugs trade, or terrorism. At present, the policy is having the effect of denying Russian businesses any opportunity to expand their businesses beyond their own borders, or that of the EAEU. This in turn means Russia and countries such as China will eventually develop and start to use their own, non-US influenced financial transfer mechanisms, beyond the reach of the US. The imposition of sanctions, when used as a weapon against trade will have the longer term impact of diminishing the SWIFT network and undoing the illegal trade and terrorism monitoring it was originally supposed to be dealing with.


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Russia Briefing is written and produced by Dezan Shira & Associates. The firm provides Russian and international businesses and governments with strategic, legal, tax and operational advisory services to SMEs and MNCs investing throughout Russia and Asia. We maintain 28 offices across China, India and the ASEAN nations as well as St. Petersburg and Moscow. Please contact the firm at russia@dezshira.com visit our Russia Desk or visit our practice at www.dezshira.com


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