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Yves here. BRICS boosters may seen the plans to advance barter trading between China as a sign of success in the two countries escaping US sanctions. Actually, it’s the reverse. Barter trade is a practice that is generally reserved for countries that have not had sufficient success in sanctions evasion by other means. It’s very inefficient and grifting friendly. You’ll see in the article below that Russia is attempting to put in place a lot of procedures. That is presumably to prevent more than minimal cheating.
Now it may be that these trades are intended primarily as a backup mechanism and are not expected to represent a lot of volume even if all the kinks are worked out. But if not, it says that the US/EU sanctions are working enough to impose extra costs and hassle on Russia counterparties.
Recall that the US has been frustrated at the degree to which Russia has been able to keep exporting despite what the US and Europe intended to be crippling sanctions. The US has tried to close some of the mechanisms that Russia’s buyers were using. One was imposing secondary sanctions, as in sanctioning parties in third countries, such as Chinese banks, that were handling Russia-related payments. That did not stop all Chinese banks from dealing with Russia, but did lead the biggest banks to pull back. It seems unlikely that the smaller fry can fully make up for the loss of this capacity. From Business Insider on September 1:
Chinese state banks have halted transactions with Russia over fears of getting entangled in US sanctions, but smaller financial institutions are taking their place, Reuters reported on Friday.
Some smaller local Chinese banks are still processing payments with Russia because they do not have global businesses to worry about.
However, they lack the necessary IT systems and staff to handle cross-border transactions and even need to send hard copies of documents to and from Russia to get them stamped and signed, an anonymous banking source told the news agency….
Despite the difficulties, Russia — a major commodity exporter — is still receiving payments for its raw materials exports, such as oil and grains, another banking source told Reuters. Its payments for China’s key technologies exports are also still getting through.
However, small Russian companies — like those in the consumer goods trade — are not so fortunate. Big Chinese state banks are cutting off transactions with Russia “en masse,” and billions of yuan in transactions are in limbo — hitting small firms hard, anonymous sources close to the government told Reuters.
The Kremlin has acknowledged the issues with trade payments and said it’s working with China on solutions.
Reuters’ story followed recent news from Russian media about hurdles that local companies were having with Chinese banks….
But banks dealing with Russia have been winding their business with the country since December, when the US approved secondary sanctions targeting financial institutions that were helping Russia.
Moscow is now rushing to set up alternative payment systems, including crypto, to facilitate trade.
The Business Insider piece also mentions that Russia and China were even having to consider resorting to barter.
A 2001 story in the Washington Post about the infamous commodities trader/tax evader Marc Rich gives an idea of how he made a fortune from arranging big barter trades for sanctioned countries like South Africa, Iran, and Libya. Admittedly this was not Rich’s only lucrative line of work. Some extracts from the story to give a flavor:
The list of countries that Rich has traded with reads like a compendium of rogue states: Iran during the hostage crisis, apartheid-era South Africa, Slobodan Milosevic’s Yugoslavia, North Korea, Moammar Gaddafi’s Libya, the Soviet Union under Leonid Brezhnev….
But it was in the former Soviet Union that he made his biggest mark. According to traders familiar with his operations, he had been active during the Soviet era, courting officials at Raznoimport, the state monopoly for commodity trading, and selling the Soviets zinc, a strategically important metal. After the Soviet Union fell apart in 1991, these relationships helped Rich become for a time the single most important Western trader in Russia.
“Marc Rich was way ahead of the big international corporations,” said Vladimir Kvint, a leading expert on Soviet and Russian business practices at Fordham University in New York. “He was one of the initiators of barter trade with the former Soviet Union. He bought oil, aluminum, cobalt at domestic Russian prices, and then sold it at world prices, which were often 10 to 15 times higher.”
Many in the pro-BRICS/anti-globalist commentariat harbor great hopes for a new currency or new payments mechanism coming out of the big BRICS leaders’ summit at the end of October. I would not be so optimistic. Multi-party negotiations are complex and payment plumbing involves a lot of nerdy details. The idea that seems both further and feasible to execute in the not-too-distant future is a messaging system for bi-lateral trade. But that won’t solve the secondary bank sanctions problem.
Originally published at Reuters; cross posted from InfoBRICS
Russia and China may begin using barter trading schemes, three trade and payments sources told Reuters, with two expecting deals involving agriculture as soon as this autumn, as Moscow and Beijing try to limit using banking systems monitored by the United States.
Bilateral payment delays were high on the agenda when 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.
Barter trading would allow Moscow and Beijing to circumvent payment issues, reduce the visibility 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.
BARTER HISTORY
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 has 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.
‘OPEN BOOK’
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 told Reuters.
“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.
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Why can’t a system using Central Banks be used? If one Russian company has a $10M receivable from a Chinese company for an oil delivery while another Russian company has a $10M payable to a Chinese Company for consumer goods, the consumer goods company could pay the Russian Central Bank $10M and which would then forward that $10M to the company that delivered oil? China’s central bank would do the mirror image for Chinese counterparties to that transaction.
Central banks do not begin to have the systems to account for commercial/retail transactions. Banks run absolutely enormous transaction volumes and are set up to deal with many many many customers. Central banks are not. This isn’t “assume a can opener,” this is “assume a can industry.”
And yet that was precisely how the trade with Soviet Union was arranged in my youth. It was indeed the task of the Bank of Finland to clear the trades by paying or receiving payments from Finnish companies depending on whether they were importing or exporting. The state of this account was an actual economic news item.
Nowadays, the Bank of Finland can’t do pretty much anything else but mint special coins for collectors and pay ridiculous salaries for ex-politicians their party wanted to get rid of.
Is China sufficiently incentivized to overcome these payment problems in a systematic way, not by haphazard local banks looking to make a dime, or will they turn to other providers in, say Africa and LATAM?
A side note: Lucho Noboa, the grandfather of the current Ecuadorean prez, Daniel Noboa, bartered bananas for Ladas, trucks, farm machinery and fertilizer from the USSR. Even though he was a die hard right winger, unlike his nephew he didn’t let ideology get in the way of profits.
Perhaps China is divided, worrying about their big trade with rhe west on one hand while wanting to boost trade with Russia on the other. Putin’s visit seems to have been disappointing.
Big banks reducing business with Russia might logically have less need of their Russian trade experts, they could migrate to the small banks, perhaps encouraged with a boost in wages. A small bank might have the effect of a big bank with sovereign state backing. Collectively, trade between Russia and China is substantial and growing, plenty room for profitable banking even if shared between a few small banks.
Seems odd, granted I have no experience with banking or trading. While Russia-China trade seems more important to Russia than China, the relationship is a critical one during these interesting times for China, too.
In the future Russia/China trade will become more & more essential to both as global resource depletion really starts to bite hard. Russia has at least 20% of global resources with less than 2% of global population, while China is resource poor while possessing, by some measures, the world’s largest economy.
Yes, India might follow China’s industrialization, boosting low cost mfg competition with China while both need raw materials. Plus China has 10x Russia’s pop, though russia’s land and pop are increasing with the ukr war. Russia has historically worried about China taking their far east, imo Russia does not soon let their new large military go.
I would be curious how “The 15-page document …..explains the requisite accounting requirements and provides contract templates for the different kinds of barter trades – (including)… multilateral” deals with the multilateral issue operationally. As someone involved in foreign trade between a large developing country and the former Soviet Union in the late 80s, it became clear that barter trade between large public sector entities in different countries may be a viable proposition, but not where large numbers of private actors (obviously in the developing country, those days), requiring immediate currency gratification, accounting benchmarking, large numbers of suppliers to pay off and multiparty multilateral contracts, are concerned. There are ways and means to get around that, but the financial sector has to be totally on board….
I’ve had one other thought, which I’m a bit surprised hasn’t been mentioned yet, amidst all the de-dollarization talk. Maybe it’s not practical though. I’ve wondered if, in addition to a payment network like SWIFT, the next most practical thing for BRICS is ironically to set aside the financial side of the ledger for a bit. Instead of weird currency experiments, setup a common planning board for production & investment.
First, if you squint at it right, isn’t that originally how the EU got off the ground, with the ECSC? The currency & financial aspects on the other hand seem to be a big part of why the EU is now struggling to stay aloft.
Second, a real production board really plays to one of the few ideological commitments BRICS does seem to share: sovereign governments call the shots, not finance. It would also create a scaffolding for providing strategic or technical assistance to each other, plus China can arguably provide a foundation if it partly internationalizes its BRI apparatus.
Ultimately, couldn’t you also use it to engage in sort of swap-like behavior, only with fixed investments (and maybe assignments of specialist labor) rather than currency? Say right now, Russian farmers are trying to sell grain and Chinese manufacturers want to sell Xmas lights. Instead of just doing that entirely B2B & figuring out how to keep Uncle Sam from grabbing the wire transfer, both agree the product markets are deep enough to avoid stepping on each others’ toes. Russia pays for today’s grain to China while China pays for today’s Xmas lights to Russia. Then to settle accounts government-to-government, China assists Russia in standing-up a Xmas light factory while Russia helps improve Chinese grain yields.
If its fewer large transactions I would have thought CB to CB could deal with this.
Smaller, more frequent transactions could use MIR? Along with specific non-International banks.
The idea you have to use something new with inevitable teething problems seems counter productive.
About Marc Rich: just a reminder that Bill Clinton, in a final act of sleaze on his way out as prez, pardoned Marc Rich, causing particular consternation among those who had been Clinton’s most loyal defenders.
https://www.brookings.edu/articles/bill-clintons-last-outrage-the-presidents-defenders-feel-betrayed-by-his-pardon-of-marc-rich/
I must be missing something obvious because, by now, China and Russia have their new payment systems nailed down and should be simply outside of that sort of sanctions, I would think: https://www.rt.com/business/455121-russian-banks-chinese-swift/? Unless the sanctions are of some other sort, I suppose.
It does not matter if they have a messaging system if banks are being sanctioned for trading with Russia and they don’t want to process transactions. You can see from the article that Chinese banks that are still meaningful traders in dollars (as in at least handle US-China trade) have dropped Russian business. All it takes is the US able to find one party trading with Russia that the Chinese bank facilitated and the US will apply sanctions.
Amends in advance YS … but … wowzers on the Trump dollar thingy ie don’t trade with it and bang 100% tariffs.
I get all the past and legacy issues just like the dramas post GFC but, bumpy road aside, considering opinions about Ukrainian and Israel with West support, dang …. who will want a bar of that if something less rank authoritarian is on offer …
I mean from my perspective, like bubble wrap popping slowly and then all at once, just like with the 4 yr run up to the GFC. All the cracks where there too see since Born and then some, no one blinked, incentives were to go too the wall and win regardless.
Everyone else in the world has a memory and history to evaluate, would not take much IMO for a huge tipping point at this moment in history.