Erika Trujillo was recently quoted by China.Table journalist Michael Radunski, see the original article below. Any views expressed below are those of the original author and do not reflect the views or statements of SEIA GmbH.
ENGLISH EDITION China.Table # 290 / 11. March 2022
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Example Iran: How China could help Russia
Will China abide by Western sanctions against Russia in the Ukraine crisis? Looking at Iran as an example shows how Beijing and Moscow could undermine the punitive measures. But Beijing has so far shown little inclination to undermine the sanctions on a grand scale.
The West is showing rare unity in the Ukraine war. It wants to persuade Russia to give in by imposing tough sanctions. But the success of these punitive measures depends on China's behavior. Will Beijing undermine the West's sanctions to help its partner in Moscow? While Beijing performs a breathtaking balancing act politically, it supposedly sides firmly with Moscow on economic issues. "China and Russia will continue to conduct normal trade cooperation in the spirit of mutual respect, equality and mutual benefit," a Chinese Foreign Ministry spokesman said.
But experts agree that China will not dare to violate Western sanctions openly. Instead, both countries could use less obvious channels to significantly weaken the impact of sanctions on Russia's financial and real economy. A look at China's attitude toward Iran shows exactly how this could unfold.
China's greed for Iranian oil
Hardly any country in the world is subject to sanctions as severe as Iran. What is currently being called the "mother of all sanctions" on Russia has long since struck Iran. The Islamic republic was excluded from the Swift international payments system. Since then, transfers to or from the country are no longer possible. Yet, Iran is still unwilling to relent in the nuclear row. This has several reasons. One of them is China, or more precisely, China's hunger for Iranian oil.
Officially, Beijing has almost completely stopped imports of Iranian oil since January 2021. Only a few weeks ago, the Chinese customs office recorded oil shipments from Iran again for the first time. Iran expert Ali Ahmadi sees it differently. "Of course, a lot of Iranian oil has been shipped to China all this time," the scientist from the Brussels-based think tank Vocal Europe told China.Table.
However, Beijing apparently goes to great lengths to conceal the transport. According to Ahmadi, there are two frequently used methods for this.
Method 1: Ships don't declare their cargo correctly or simply relabel their cargo. "Then Iranian oil quickly becomes oil from Malaysia or the United Arab Emirates," Ahmadi explains. And indeed: China's oil imports from these two countries have risen conspicuously.
Variant 2: The oil is simply transferred from an Iranian vessel to a tanker from a different country at sea. And so, despite sanctions, a lively trade has developed. According to surveys by data platform Vortexa Analytics, up to 660,000 barrels of Iranian oil were shipped to China – every day.
China's hunger for energy is apparently too great to voluntarily surrender trade with one of the world's largest oil suppliers. Especially since Iran has to sell its oil at particularly low prices due to Western sanctions. This is an offer that Beijing could not pass up. This could also apply to Russian crude materials. Trade of Russian oil and gas has not yet been sanctioned, which is partly because of Germany, which otherwise sees its energy security in jeopardy. But this may yet happen.
Payment without Swift – small banks and chips
The situation is different for Russia's financing options, as some Russian banks have already been excluded from the Swift international payment system. So have Iran's financial institutions, which prohibits the use of the US dollar. There have been multiple solutions to this in Sino-Iranian trade.
China transfers payments for its oil imports to Iranian accounts in China, Ahmadi explains. Technically, the money does not leave China. "Since repatriation of these funds is made difficult by the sanctions, Iran uses them to purchase directly in China, especially materials and supplies such as machinery for factories." Following this example, Russian companies are currently attempting to open more bank accounts with Chinese financial institutions (China.Table reported).
In addition, China repeatedly utilized small, supposedly insignificant banks to undermine Western sanctions and finance trade with Iran. The Chinese payment system CIPS could therefore become interesting for Russian banks (China.Table reported). Similar to Swift, the Cross-Border Interbank Payment System offers its participants clearing and settlement services for cross-border RMB payments. However, Cips is limited to the Chinese national currency - and since the yuan is not freely exchangeable, Cips has not yet established itself internationally.
Crypto as a loophole?
In parallel, the Russian central bank has long since taken precautions: It is said to hold investments equivalent to between billion and billion in Chinese yuan with the Chinese central bank. In addition, an agreement on a bilateral swap line with an equivalent value of around billion was reached back in 2014. It is a kind of loan that Chinese corporations can use to pay for Russian energy imports.
Sanctions expert Erika Trujillo cites yet another new payment method as a potential option for sanctions breakers: cryptocurrencies. "Basically, cryptos could provide more transparency and security if we were able to develop means to better monitor payments and apply compliance mechanisms." Trujillo is a lawyer and co-founder of a firm that focuses on legal safeguards for businesses: SEIA Compliance Technologies. SEIA also helps companies manage risks such as sanctions. Trujillo explains that there has been a lack of transparency regulations and compliance mechanisms for cryptocurrencies. With cryptocurrencies carrying a reputation of illegality and politicians so far not daring to impose the necessary regulation, a potential loophole emerges. "Pretending it doesn't exist or disparaging it as a payment method doesn't make us safer," Trujillo warns.
China and Russia work on de-dollarization
To many politicians, sanctions seem like a wonder weapon, the sanctions expert explains. But punitive measures often have unintended consequences. And in the case of Russia and China, these consequences could be far-reaching. "The more we sanction actors like China and Russia, the stronger their alternative financial systems become, and this, in turn, can threaten the supremacy of US institutions, which serves as the foundation for the scope of sanctions."
To circumvent the sanctions imposed by the West, Russia and China will therefore try and conduct their business outside the US dollar. It is a fortunate coincidence that the leadership in Beijing is striving for the so-called de-dollarization of world trade anyway (China.Table reported). And since the list of sanctioned countries is currently growing, this project is now gaining unexpected momentum.
No aircraft components for Russia
But China's de-dollarization project is still quickly reaching its limits: Beijing had to cut back imports of Russian coal, for example, because almost all contracts are denominated in dollars, a Chinese trader told Reuters. Negotiations are now underway with Russian exporters to settle future payments in yuan or gold.
And so it is to be expected that China – as it has with Iran – will find a number of ways to continue doing business with Russia. But they will weigh their options. Because Beijing will not be willing to give up its trade with the US and Europe, not even for Moscow. The news on Thursday that China will not supply aircraft components to Russia for the time being fits into this. This is of particular significance. The ban on exporting spare parts for aircraft was one of the first sanctions against Russia. Without a supply of parts, Aeroflot's fleet will not remain airworthy for long. Quickly, there was talk about China's circumvention of these sanctions. After all, China's airlines not only have unlimited access to parts from Airbus and Boeing. Airbus even operates a plant in China.
The refusal to supply aircraft components is now a signal that, while China is paying lip service to Russia, it is not outright undermining all sanctions. The more united the West is, the more likely the People's Republic will give in. Because at the end of the day, Beijing is primarily concerned with one thing: China's interests.