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This content was produced in Russia where the law

restricts

coverage of Russian military operations in Ukraine

MOSCOW, June 20 (Reuters) - Russia-China trade options

have narrowed since the U.S. imposed sanctions last week on the

only Russian bank branch in China, but President Vladimir

Putin's Chinese visit last month has helped ensure the two

countries have payment alternatives for now, three sources said.

Since Putin's visit, specially authorised banks have been

set up in border regions which allow Russian firms to open

non-resident accounts (NRA) with Chinese banks, a step that has

become more important since VTB's Shanghai branch was

targeted with sanctions, they told Reuters.

Trade between Russia and China ballooned to a record $240

billion in 2023. Maintaining the flow of income and goods, which

is crucial to the Kremlin, depends on ensuring smooth payments.

The workaround, which involves smaller, regional banks that

can for the time being fly below the U.S. sanctions radar, shows

how Moscow and Beijing are having to take increasingly complex

steps to ensure bilateral payments continue to be made but at

the same time potentially exposing some Chinese financial firms

to U.S. sanctions as they look to circumvent restrictions.

Using banks in border regions makes it easier for

go-betweens working on behalf of Russian companies to flit

between them. The scheme, involving small banks with limited or

no business with countries which Russia considers unfriendly,

also reduces the potential fallout for China.

However, the window for them to carry out payments for

Russian companies may be narrowing. A senior U.S. Treasury

official said this month it is working to identify smaller banks

with weaker compliance departments that are still helping to

process transactions that aid Russia's military output.

Trade with Beijing has become more important to Moscow since

it sent its army into Ukraine in February 2022. Russian banks

were subsequently blocked from the SWIFT global payments system,

while many Western countries and companies severed ties with

Russia.

"After (Putin's) visit, banks have appeared in one of

China's provinces that are opening NRA accounts for Russian

companies on Chinese territory," said one banking source, who

declined to disclose names due to sanctions risks.

Only a handful of banks, located near the border in the

northeast, still work with Russia, a second banking source said.

"We are not even talking about ... large and medium-sized

banks today," the person said. "None of them work with Russia.

This is the problem that we must really recognise."

The People's Bank of China and China's banking regulator,

the National Financial Regulatory Administration, did not

respond to requests for comment.

After more Chinese firms were sanctioned by the U.S., many

may have decided to stop any business with Russia and imports

from China could drop, said Yevgeny Kogan, investment banker and

professor at Russia's Higher School of Economics.

Sanctions on Russian bank subsidiaries in China also create

issues, he added.

'FRIGHTENING'

VTB was already under sanctions, but the U.S. Treasury

modified restrictions on previously targeted Russian banks to

include foreign entities, including VTB's Shanghai branch, a

step sources said would complicate payment flows.

"The branch of a Russian bank that we all love to use in

China was included in the sanctions package," said a source in

the payments market said, who expects even Chinese banks to stop

all dealings with the branch as a result.

Prior to the latest sanctions, CEO Andrei Kostin said VTB

was tripling staff in Shanghai to try and cut queues of clients

trying to open accounts. Reuters has previously reported delays

as long as six months.

"We do not comment on the activities of our foreign

entities," VTB said.

When a Russian company buys or sells goods or services with

a Chinese trading partner it needs to be able to receive or pay

the cash through payments systems operated by banks.

Russia's largest private lender, Alfa Bank, has for months

been working on opening two Chinese branches, in Shanghai and

Beijing, but without success. That did not stop it touting its

China credentials with a vast red inflated dragon adorning its

stand at a St Petersburg economic forum this month.

"American sanctions are the most frightening, including for

our Chinese partners," the payments markets source said. "As the

Chinese say, they fear them like the tiger."

The threat of secondary sanctions, which could cut

institutions off from dollar access, has spooked Chinese banks

who do not want to lose access to global markets, the person

said, even if there is lucrative trade to be done with Russia.

LIMITED RUSSIAN SWAY

For Russia, payment issues hurt export revenues, disrupt

supply chains and raise import prices, the central bank has

said, while its oil firms face months-long payment delays.

Compared to U.S. and EU markets, it has limited pull.

"No-one in China is ready to fall under secondary sanctions

and lose the global market just because of Russia," the payments

markets source said. "Neither manufacturing companies, nor

financial structures, including banks."

The second banking source said non-sanctioned Russian banks

were still acceptable to Chinese partners, but U.S. restrictions

are a killer blow, with even specially authorised Chinese banks

halting settlements.

Russian companies can now either open an NRA account with a

Chinese bank or create a Chinese subsidiary and open accounts

domestically, the person said.