New payment network that reduces costs in Russian and China trade
According to Reuters, sanctioned Russian banks and companies have established a secret 'netting' system to facilitate payments in trade with China. This system emerged after SWIFT restrictions and threats of secondary sanctions, and accelerated the flow of funds, significantly reducing transaction costs. The system helps Russia to continue its trade with China.
According to Reuters news agency's report based on four sources of foundations on payment transactions, sanctioned Russian banks and companies are actively using netting systems to carry out export and import payments in trade with China.
While these systems significantly reduced the costs of Russia's business world, they also accelerated the flow of money.
Sources stated that in early 2024, the commissions of payment agencies increased to 12 percent of the invoice amount, but now the agency commission has dropped to an average of 2 to 3 percent.
This decline was made possible after major Russian banks and exporters created closed netting systems with China to simplify financial logistics.
Financial logistics suffered two heavy hits with the collective withdrawal of Russian banks from SWIFT in 2022 and the nearly halt of direct payments with Russia under the threat of secondary sanctions by major Chinese banks in 2024.
“At that time, everyone was faced with the need to structure financial flows through friendly countries to protect these payments from blocking, but people have now learned to work with it, different payment solutions are developing,” said a source from the payments market.
The same source and others said that the cheapest way to pay with China right now is through “netting” mutual offsetting.
The same source said, "As a sub-supplier, in addition to payment agency services, mutual offset, sessions... We even do clearing transactions so that the money does not exceed the limit. Many companies, especially major importers, are investing to develop their own network of foreign structures and not depend on third parties," he added.
In her recent speech in parliament, the Governor of the National Bank of Russia, Elvira Nabiullina, stated that Western sanctions made cross-border payments difficult for Russian companies, but alternative payment channels emerged.
Another source from the banking circles, "The most effective tool is netting goods. Essentially, this is a solution that includes property swap and the use of payment agencies that serve and offset the counterstreams of exporters and importers in their own environments and service banks," he said.
The source said that this service was created by major Russian banks in their own circles and thanks to their participation, this system has not yet seen a significant default.
He stated that large companies are interested in securing a bank as a guarantor of payments, and banks offer tools to protect them from the risk of default.
Bankers, while describing the payment system with China through payment agencies, said that payments went directly to any Chinese bank without delay, provided that the other party is not under sanctions and that the other party is registered in one of the 11 provinces of China (Anhui, Heilongjiang, Shandong, Zhejiang, Guangdong, Xinjiang, Jilin, Shaanxi, Sichuan, Fujian and Hebei).
The 11-state scheme, also called the "China route", is mainly aimed at large companies, the disadvantage of which is the need for approval of each payment.
Also, according to the source, the supplier does not always accept this scheme, because in general, it cannot withdraw export VAT.
Another banker described the advantages of the service as follows: “The scheme allows direct work with 11 Chinese provinces, which are the basis for the production of goods exported to Russia. The cost is calculated according to the Central Bank exchange rate, there is no spread on it.”
The cost of agency services starts from 1 percent of the invoice amount in imports and 0.5 percent in export transactions.
Banks stated that they helped VAT refund through this scheme by advising Chinese counterparties.
“According to statistics, we currently have 100 percent money transfer success, so not even a single refund has happened,” a banker said. The money is delivered in two days. Currently, there is a barter session once a week, on Thursdays," he said.
He added that they plan to start two trade-in sessions, Tuesday and Thursday, from the end of April.
China's Ambassador to Moscow, Zhang Hanhui, confirmed that the exchange allows to regulate mutual payments between the two countries.
In a statement to members of the press, Zhang said, "We can turn international mutual offsetting into domestic offset. Then we compare the accounts and that's all; balance," he said.
Diplomat said, “There is a need for a new channel instead of SWIFT among our banks. This issue is currently being discussed," he said.
Osman Kabaloyev, Deputy Director of the Department of Financial Policies of the Ministry of Finance of Russia, stated that the authorities support the creation of alternative payment mechanisms in order to create a complete "payment menu" consisting of different options for the business world and banks.
“Thanks to the wide range of solutions, the prices of alternative payments in the banking system have fallen recently... Every major exporter or importer is trying to be involved in payments by using the facilities of associated companies outside Russia, by competing with banks,” a source from the banking circles said.
The source added that the average range of delivery tariffs, including currency exchange rate commissions for large institutional customers, is 2 to 3 percent of the payment amount, which applies to both fiat and crypto payments, and noted that the tariffs for small and medium-sized businesses do not exceed 4 percent.
The source said that the price conditions on the "China road" are optimal, but there are restrictions on the names of provinces and goods, and there are few clearing sessions.
Global trade wars have reinforced the assumption that China will now approach US threats more easily to the Russian business world.
Aleksandr Shohin, President of the Russian Association of Industrialists and Entrepreneurs (RSPP), said, "There is a high probability that Chinese imports will actively penetrate the Russian market. It is not excluded that the Chinese stop being afraid of secondary sanctions," he said.
The Chinese Ambassador said, "Russia-China relations are only changing for the better, from victory to victory... Sooner or later we will overcome American sanctions."