Chinese Banks Extend Billions in Loans to Russian Banks as Western Lenders Withdraw

Amid Western financial institutions scaling back their operations in Russia due to the ongoing Ukraine conflict, four of China's largest banks have stepped in to provide substantial loans to Russian banks, signaling China's efforts to promote the renminbi as an alternative global currency to the US dollar.

Over the course of 14 months until the end of March this year, China's exposure to Russia's banking sector quadrupled, according to data analyzed by the Kyiv School of Economics. China's Industrial and Commercial Bank, Bank of China, China Construction Bank, and Agricultural Bank increased their combined exposure to Russia from $2.2 billion to $9.7 billion during this period. ICBC and Bank of China accounted for $8.8 billion of these assets.

In contrast, Western banks faced pressure from regulators and politicians in their home countries to exit Russia, while international sanctions created significant hurdles for conducting business. Austria's Raiffeisen Bank, which had the largest foreign bank exposure to Russia, increased its assets in the country by over 40 percent, from $20.5 billion to $29.2 billion, during the same 14-month period. However, Raiffeisen has since expressed intentions to find ways to exit Russia, reducing its assets to $25.5 billion.

The Chinese banks' loans to Russian counterparts are part of Russia's shift toward adopting the renminbi instead of the US dollar or euro as a reserve currency. This trend reflects the deepening economic ties between Russia and China, with trade between the two countries reaching a record $185 billion in 2022.

Before the Ukraine conflict, over 60 percent of Russia's export payments were made in "toxic currencies" like the dollar and euro, while the renminbi accounted for less than 1 percent. However, the share of "toxic" currencies in export payments has since dropped to less than half, with the renminbi making up 16 percent of such payments, according to data from Russia's central bank.

Raiffeisen is one of the few Western banks maintaining a significant presence in Russia. However, Russian reforms implemented last summer have made it more challenging for foreign banks to sell their Russian subsidiaries. The European Central Bank is also increasing pressure on banks it supervises, including Raiffeisen, to exit Russia.

Despite these challenges, Raiffeisen's Russian business reported a 9.6 percent increase in profits to €867 million in the first half of this year. The bank is exploring ways to sell or spin off its Russian business while complying with local and international laws and regulations.

In total, the proportion of Russian banking assets held by foreign lenders decreased from 6.2 percent to 4.9 percent in the 14 months leading up to March.

ICBC, Bank of China, China Construction Bank, and Agricultural Bank of China declined to comment on the matter.

By fLEXI tEAM