China, Russia Looking at Barter Trade to Avoid Bank Scrutiny

Russia and China are looking to use barter trade schemes to avoid use of banking systems that are monitored by the United States.

Trade and payments sources say they expect agricultural deals this autumn, as Moscow and Beijing try to limit using banking systems – because of US warnings it would punish Chinese banks supporting Russia while it wages war in Ukraine.

Bilateral payment delays were reportedly discussed when Russian President Vladimir Putin visited China in May and although workarounds have emerged, such as using small, regional Chinese banks whose activities are harder for Washington to detect, payment issues remain, the sources told Reuters.

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Barter trading would allow Moscow and Beijing to circumvent payment issues, reduce the visibility that Western regulators have over their bilateral transactions, and limit currency risk.

Russia is developing regulations for barter trading and the Russian sources Reuters spoke to are working on the assumption that China is doing the same.

The sources, who requested anonymity due to the non-public nature of the information, are all closely involved in bilateral trade.

A top manager at a large Russian bank said a barter scheme was being prepared, but refused to disclose details. One source who works in payments said a trade with Russia exporting food products was under discussion.

Russia’s industry and trade ministry and China’s commerce ministry did not respond to questions about the commodity barter trade.

A way to avoid international settlements & cash

China and Russia have a history of barter deals. In 2019, China agreed to trade palm oil worth nearly $150 million from Malaysia for construction services, natural resources products, and civilian and defence equipment.

In 2021, a Chinese company exported auto parts worth $2 million to Iran in exchange for pistachios.

Barter deals between Moscow and Beijing were common before the Soviet Union collapsed and continued into the 1990s, but the deals now under discussion would be the first in around 30 years, the sources said.

“I remember in the early 1990s…there were barter deals between China and Russia back then,” said Kyle Shostak, deputy board chairman at Qifa, a Chinese-Russian company seeking to ease bilateral trade woes with digital settlements.

“Then, due to the development of the banking sector, the whole business, the whole trade between Russia and China completely switched to bank settlements.”

Shostak said Qifa’s platform would be ready to facilitate barter trading when regulations were fully in place.

Russia’s economy ministry published a document in February advising Russian companies how to conduct barter transactions and pointing out pitfalls to avoid.

The 15-page document includes a step-by-step guide for calculating costs and customs duties, explains the requisite accounting requirements and provides contract templates for the different kinds of barter trades – bilateral, multilateral and tolling, where a factory is used by a third party for example.

The document describes barter trades as a good way to avoid international settlements and cash.

Russia’s economy ministry did not respond to questions about the document or planned barter trades with China.

Barter trading offers a way out of huge payment problems with both sanctioned and civilian goods, said a Russian government source, lamenting that Putin’s trip to China had not improved prospects as hoped.

“There are political things that need solving, but despite our boss’ visit to China, they haven’t been,” the person said.

A different source at a Russian industrial firm said metals exports from Russia in exchange for machines from China were being discussed between companies.

Lack of direct payments system

The transparency of more conventional trading means is a deterrent to bilateral China-Russia trade, as is Russia and China’s lack of a direct payments mechanism, the sources said.

Global financial messaging system SWIFT remains an option for non-sanctioned banks, but it is an “international banking system that is completely transparent to our friends, among them, the Americans,” a payments intermediary said.

“They are closely watching this open book. So, the less SWIFT is used for carrying out interbank operations between Russian and Chinese banks, the calmer it is.”

The Bank of Russia’s System for Transfer of Financial Messages (SPFS) and China’s CIPS payment platform are not fully linked yet.

“Today there is still no IT-airlock that would link these two systems, so the bridge is still either SWIFT or through remote banking services which are available in almost every bank’s software,” the payments intermediary said.

Russia’s Central Bank Governor Elvira Nabiullina has previously talked up a BRICS Bridge payments system, which would link member countries’ financial systems.

Progress has been slow. A Reuters source close to the project said the launch of settlements in digital currencies using this bridge would not come before 2028.