G7 Targets Chinese Banks in Sanctions Effort

G7 targets small Chinese banks in a crackdown on Russia’s war economy

The G7 targets Chinese banks in Italy, addressing the issue of small Chinese banks aiding Moscow in evading Western sanctions amid the war in Ukraine. Western officials are discussing plans to announce impactful new sanctions and export controls to crack down on Sino-Russian trade, particularly the supply of dual-use goods with military applications. While some big banks in China have started limiting cross-border transactions with Russia, Chinese companies are turning to smaller banks or underground financing channels to continue trading with Russia.

The United States has imposed new sanctions on hundreds of individuals and companies, including seven Chinese firms, for aiding Russia in circumventing Western restrictions on key technologies. However, divisions within the West and the G7 have emerged on how to address China’s role in the conflict, with some member states hesitant to take action that could damage bilateral relations.

Key Concepts

• The G7 summit in Italy addressing Chinese banks aiding Moscow in evading sanctions.
• Western officials focusing on cracking down on Sino-Russian trade of dual-use goods.
• China has become Russia’s main partner since the outbreak of the war in Ukraine.
• Big banks in China limiting cross-border transactions with Russia to avoid U.S. sanctions.
• U.S. imposing new sanctions on Chinese firms for aiding Russia in bypassing restrictions.
• Calls for tougher action, including sanctions on Chinese banks, to deter support for Russia.
• Divisions within the West and G7 on how to address China’s role in the conflict.
• Some G7 member states hesitant to impose sanctions on China due to strong trade ties.
• Efforts by China and Russia to conduct more trade in yuan to insulate economies from U.S. sanctions.
• China gradually becoming immune to Western economic tactics, potentially reinforcing the narrative that sanctions are ineffective.

China’s small banks have become a new target as Western officials try to hinder Beijing’s economic support for Russia in the context of the war in Ukraine.

How to deal with small Chinese financial institutions that help Moscow evade Western sanctions is a major topic at the Group of Seven (G7) summit in Italy from June 13 to 15. U.S. officials said that cracking down on the rapidly growing Sino-Russian trade, especially the supply of non-lethal but dual-use products suitable for military use, is a top priority.

White House national security spokesman John Kirby told reporters on June 11: “We will address China’s support for the Russian defense industrial base. We will continue to increase the cost of the Russian war machine. This week, we will announce an impactful set of new sanctions and export controls.”

Western officials have not commented publicly on plans to target smaller Chinese banks, but Reuters reported that the United States and other G7 members, including Britain, Canada, France, Germany, Italy, and Japan, will focus on discussions in private meetings. How to deal with this problem, but no immediate sanctions are expected to be imposed on these banks.

Since the outbreak of an all-out war in Ukraine, China has become Russia’s main partner. According to an analysis of Chinese customs data, in 2023, 90% of dual-use goods considered “high priority” and used to manufacture Russian weapons came from China.

Large Chinese banks have begun restricting cross-border transactions involving Russia and Russian companies, fearing being hit by U.S. secondary sanctions. Chinese companies trading with Russia have turned to smaller banks or underground financing channels, which are difficult to trace and less visible in the international financial system.

“This is what I call a ‘throwaway banking’ strategy,” Tom Keatinge, director of the Financial Crime and Security Research Center at the Royal United Services Institute, told Radio Free Europe. “If the U.S. or other G7 members sanction these banks, the contagion effect is likely to be very limited and the impact on banks will be limited because these banks do not need to be connected to the international banking system.”

Possible Countermeasures

At meetings in April and May, G7 foreign ministers gathered in Italy to try to present a united front on key issues and harness their combined economic power, with the question of how to deal with Russia and China taking center stage. That will continue into this summit of G7 leaders, who are expected to discuss a range of issues, from using Russia’s assets frozen by the West to generate profits for Ukraine to Israel’s war with Hamas and the increasing influence of the Indo-Pacific region.

On the eve of the summit, the United States imposed new sanctions on hundreds of individuals and companies, including seven Chinese companies, who helped Moscow circumvent Western blockades on access to critical technology.

China’s Foreign Ministry said on June 11 that it would take all necessary measures to “resolutely safeguard the legitimate rights and interests of Chinese companies” in response to warnings from Washington and its partners about links between small Chinese banks and Russia.

The United States and its partners have so far been wary of pursuing Chinese financial institutions for their ties to Russia, particularly through sanctions on major banks because that could have ripple effects across the global economy and heighten tensions between Beijing and Washington.

Senior U.S. officials say Beijing is supplying Moscow with drone and missile technology, satellite imagery, machine tools, and other dual-use goods and have stepped up criticism of Beijing in recent months. U.S. Treasury officials have repeatedly warned financial institutions in Europe, China, and elsewhere that they face sanctions for helping Russia circumvent Western sanctions. In December, Washington said it would impose sanctions and tighten export controls to reduce Russia’s ability to circumvent sanctions, including possible secondary sanctions on banks and other financial institutions.

The warnings appear to have had some effect, with large Chinese banks stepping up scrutiny of transactions with Russian entities and others and even halting transactions with some companies. Trade flows between China and Russia have also slowed down amid continued warnings from the West. Chinese data for March and April shows exports to Russia are falling. According to reports, this is related to the Bank of China’s fear of secondary sanctions from Washington.

However, renewed discussions at the G7 meeting showed that Western officials are concerned that some Chinese financial institutions are still promoting trade in civilian goods with military applications on a large scale. Keating said the United States and its G7 partners risked paying lip service if they did not take action to sanction Chinese banks or other entities that helped Russia wage war against Ukraine. He said: “Since December 2023, this risk has been rising due to the lack of public action. Simply put, without action, foreign financial institutions have no reason to really worry about the consequences.”

Prevent Sanctions

Calls for China to take a tougher stance on its support for Ukraine have also exposed divisions within the West and even among members of the Group of Seven.

While the G7 has been largely united in its support for Kyiv and has taken other measures on trade to address China’s overcapacity, including the EU’s recent announcement of new tariffs targeting Chinese electric vehicles, targeting China’s banks has been less so. Simple.

Some member states have strong trade ties with China and are therefore wary of actions that could jeopardize bilateral relations, while curbing Beijing’s support for Russia through sanctions may be difficult to achieve. The United States has taken action against smaller Chinese banks in the past, such as sanctioning the Bank of Kunlun in 2012 over issues such as cooperation with Iranian institutions, but many of China’s smaller banks engaged in dual-use trade also have limited contact with the Western financial system and even No contact.

In addition, after the war in Ukraine broke out, China and Russia worked to conduct more trade using China’s yuan instead of dollars, potentially insulating their economies from the impact of U.S. sanctions.

Agathe Demarais, a senior policy fellow at the European Council on Foreign Relations, said it was unclear how the G7 countries planned to respond to China’s growing support for Russia, “if China, which handles sensitive transactions between Beijing and Moscow, “Without links to Western financial instruments, any action will be ineffective.”

“Implementing ineffective sanctions could backfire, reinforcing China’s and Russia’s false claims that the measures are ineffective,” she said. “This dilemma illustrates how China is gradually making its economy immune to sanctions and gradually becoming immune to Western economic tactics.”