New Russia-China payment network cuts trade costs

According to a report from the Reuters news agency, based on four sources familiar with payment processes, sanctioned Russian banks and companies are actively using netting systems to carry out export and import payments in trade with China.

These systems have significantly reduced costs for Russian businesses while also accelerating cash flow.

Sources stated that in early 2024, payment agent commissions reached up to 12% of the invoice amount, but currently, the average agent commission has dropped to 2% to 3%.

This decrease became possible after large Russian banks and exporters established closed netting systems to simplify financial logistics with China.

Financial logistics had suffered two heavy blows: the mass exclusion of Russian banks from SWIFT in 2022 and the near halt of direct payments with Russia by major Chinese banks in 2024 under the threat of secondary sanctions.

A source from the payment market said, “At that time, everyone faced the need to structure financial flows through friendly countries to protect these payments from blockages, but people have now learned to work with this, different payment solutions are developing.”

The same source and others said that the cheapest way to make payments with China is currently through mutual offsetting via “netting.”

The same source added, “In addition to payment agent services as sub-suppliers, mutual offsetting, sessions… We even do swap transactions so that money does not cross the border. Many companies, especially large importers, are investing in developing their own foreign structure networks and not depending on third parties.”

Elvira Nabiullina, Governor of the Bank of Russia, stated in a recent speech in parliament that Western sanctions have made cross-border payments difficult for Russian companies, but alternative payment channels are emerging.

Another source from banking circles said, “The most effective tool is goods netting. Essentially, this is a solution that involves property exchange and the use of payment agents who serve the counter-flows of exporters and importers within their own circles and service banks, offsetting these flows.”

The source said that this service was established by large Russian banks within their own circles and that thanks to their participation, this system has not yet seen significant defaults.

They noted that large companies are interested in having a bank as a guarantor for payments and that banks offer tools that protect them from the risk of payment agent default.

Bankers explaining the payment system with China through payment agents said that payments go directly to any Chinese bank without delay, provided the goods are not sanctioned and the counterparty is registered in one of China’s 11 provinces (Anhui, Heilongjiang, Shandong, Zhejiang, Guangdong, Xinjiang, Jilin, Shaanxi, Sichuan, Fujian, and Hebei).

The 11-province scheme, also called the “China path,” is primarily aimed at large companies, and its disadvantage is the requirement for each payment to be confirmed.

Furthermore, according to the source, the supplier does not always accept this scheme, as they generally cannot reclaim export VAT.

Another banker described the advantages of the service: “The scheme allows direct work with 11 Chinese provinces that are fundamental for the production of goods exported to Russia. The cost is calculated according to the Central Bank rate, there is no spread on it.”

The cost of agent services starts from 1% of the invoice amount for imports and 0.5% for export transactions.

Banks stated that they assist with VAT refunds through this scheme by consulting with Chinese counterparties.

A banker said, “According to statistics, we currently have 100% money transfer success, meaning there hasn’t been a single return. Money is delivered within two days. Currently, there is one clearing session per week, on Thursdays.”

They added that they plan to start two clearing sessions from the end of April, on Tuesdays and Thursdays.

Zhang Hanhui, China’s Ambassador to Moscow, confirmed that clearing allows for the regulation of mutual payments between the two countries.

Zhang told reporters, “We can turn international mutual offsetting into domestic offsetting. Then we compare the accounts, and that’s it; the balance.”

The diplomat said, “There is a need for a new channel instead of SWIFT between our banks. This issue is currently being discussed.”

Osman Kabaloyev, Deputy Director of the Financial Policy Department at the Russian Ministry of Finance, stated that the authorities support the creation of alternative payment mechanisms to create a full “payment menu” consisting of different options for businesses and banks.

A source from banking circles said, “Thanks to the wide range of solutions, the prices for alternative payments in the banking system have recently decreased… Every large exporter or importer, competing with banks, tries to get involved in payments using the capabilities of their related companies outside Russia.”

The source added that the average range of delivery tariffs, including currency commissions, for large corporate clients is 2% to 3% of the payment amount, which applies to both fiat and crypto payments, and noted that tariffs for small and medium-sized businesses do not exceed 4%.

The source said that the price conditions on the “China path” are the most favorable, but there are restrictions regarding provinces and goods names, and clearing sessions are infrequent.

Global trade wars have reinforced the assumption among Russian businesses that China will now approach US threats more easily.

Aleksandr Shokhin, President of the Russian Union of Industrialists and Entrepreneurs (RSPP), said, “There is a high probability of active penetration of Chinese imports into the Russian market. It is not excluded that the Chinese will stop being afraid of secondary sanctions.”

China’s Ambassador said, “Russia-China relations are only changing for the better, from victory to victory… We will overcome American sanctions sooner or later.”