Russia sanction: China’s small banks come under scrutiny for their support of Moscow amid US, EU financial hurdles

China’s smaller banks could come under greater scrutiny over financing to Russia as the nation’s biggest lenders are already showing signs of complying with US and European sanctions in a bid to protect their large international footprints.

Within the commercial banking system, one model allowing China to support its strategic partner would be through an institution similar to the Bank of Kunlun, a small and unlisted state-owned lender which continued to finance payments to Iran even after Washington shut the bank out of the dollar market.

Small banks that don’t have any international business exposure are likely to keep financing Russia and service payments, said Chen Zhiwu, a professor of finance at the University of Hong Kong Business School. “For them, the risk of potentially being sanctioned by the US and West European countries is not that high,” he said.

China’s overall willingness to support Russia is still unclear, with President Xi Jinping calling for negotiations over Russia’s invasion of Ukraine. The full extent of Washington and European Union sanctions are also still being worked out. The White House has said “selected” Russian banks would be removed from the Swift messaging system, though officials were also looking at exceptions for the energy sector.

But any candidate for financing to Russian entities sanctioned by the West would need to be willing to give up its access to dollar and euro markets, and face restrictions on foreign investment if they are listed on stock exchanges.

While continuing to deal with Russian entities sanctioned by the US and EU would not be illegal under Chinese or international law – China has not imposed sanctions on Russia and neither has the United Nations – banks run the risk of secondary sanctions if they do business with sanctioned entities, which can cut off their ties with US and EU investors.