Sino-Soviet barter trade returns to avoid Western sanctions
In the 1980s, China and the Soviet Union conducted most of their trade in barter, to avoid using Western banks and foreign currency. China exchanged textiles and televisions for Soviet machines and equipment.
In 2024, barter trade between the two is returning. This time its purpose is to avoid the tightening Western sanctions that aim to shut down the Russian war economy.
In February, the Russian Ministry of Economy published a document advising its companies how to conduct such trade, calculate costs and account for transactions. Banking sources expect the first such deal this autumn, with Russian metals exchanged for Chinese machinery.
Since its invasion of Ukraine in February 2022, Russian banks have been excluded from the dollar-based SWIFT system that accounts for the majority of global financial transactions. Russia has its own such system, but it is not compatible with the Chinese system.
Chinese and Russian firms use their own currencies instead. In August, Russian Finance Minister Anton Siluanov said that, of the US$136.67 billion worth of bilateral trade in the first seven months this year, 90 per cent was conducted in renminbi or rubles. He forecast that full 2024 trade would exceed the US$240 billion last year, an annual record.
Washington is increasingly angry that Western sanctions have not seriously handicapped Russia’s war economy. Arms and weapons factories are working 24 hours a day and offer generous wages to attract sufficient workers.
Siluanov said that, in the first half of this year, Russia’s economy grew 4.7 per cent, with unemployment a record low of 2.4 per cent and a 10 per cent growth in real wages.
On August 23, the U.S. Treasury Department issued a new list of sanctions, including measures against Chinese firms that ship machine tools and microelectronics to Russia. “Companies, financial institutions and governments around the world need to ensure they are not supporting Russia’s military-industrial supply chain,” said Wally Adeyemo, Deputy Treasury Secretary.
Of the 123 entities targeted, 42 were Chinese. Washington says that Chinese companies are the most important foreign partner of this military-industrial complex, supplying electronics, semi-conductors, machine tools and other components.
Beijing insists that it has not exported arms and weapons to Russia during the war and says that it only sells civilian goods.
In August, Chinese Prime Minister Li Qiang chaired the 19th regular meeting with his Russian counterpart Mikhail Mishustin in Moscow. They signed 17 agreements for co-operation in different sectors. Their joint communique did not mention Ukraine or the invasion.
At the same time, a delegation of the PLA Army Ground Force led by Commander of the Ground Force General Li Qiaoming was in Moscow to discuss bilateral military cooperation. In July, the PLA held 11 days of joint military training with the Belarus army, just kilometres from Poland, a NATO member, for the first time.
Western sanctions have been unsuccessful in curbing China’s booming trade with Russia. But they have deterred Chinese major banks from financing it. They have too much to lose from business with Western companies and access to the global financial system. Small, regional Chinese banks with limited or no exposure to the international system have been willing to finance the trade.
Chouzhou Commercial Bank was one of them. It is based in Yiwu, Zhejiang province, one of the most important logistic hubs in China for exports to Russia. But, in February 2024, it stopped financing the trade for fear of penalties from the sanctions.
The benefits of barter are that it avoids issues of payment, limits currency risk and makes it very difficult for Western regulators to track what is being bought and sold.
The downside is that it is cumbersome and bureaucratic. Each side must find goods on the other side that match their own.
The most famous Soviet barter deal, worth US$3 billion, was in the 1990s. PepsiCo sold its Pepsi-Cola in exchange for Soviet warships and Stolichnaya vodka. It sold the cola in syrup form, which the Soviets diluted and sold in large bottles. PepsiCo sold the warships for scrap and sold the vodka through distributors in the U.S.
The Soviet Union and China under Mao both set up an economic system of self-sufficiency with the least possible links to the “capitalist” world and limited need for foreign exchange. They saw Western countries as hostile and untrustworthy.
History is repeating itself.
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