China eases U.S. concern on Russian sanctions by drilling into their details

Chinese companies and government officials are rushing to find out how to comply with U.S. sanctions on Russia, easing concerns in the White House that Beijing will help Vladimir Putin evade them.

Chinese diplomats in Washington have been in contact with U.S. counterparts asking for granular details on the sanctions, according to people familiar with the situation who asked not to be identified. That’s encouraged U.S. officials, even though they remain wary that China may simply be looking for loopholes to help Russia, the people said.

For now, they added, there’s no consideration of imposing Iran-style secondary sanctions.

In Iran’s case, the U.S. imposed financial sanctions on foreign companies, no matter their location, that did business with sanctioned Iranian people or entities. Such punishments are highly polarizing and could alienate partners that do business with China but whose support the U.S. wants against Russia.

Within China, trade lawyers and risk consultants said they’ve seen a surge in inquiries from Chinese clients to ensure they comply with sanctions from the U.S., the European Union and elsewhere.

The global spotlight on the Russian sanctions worries Chinese companies, said one Asia-based international trade lawyer, who declined to be named due to the sensitive nature of the topic.

The Chinese inquiries covered issues such as the sale of goods to Russia that rely on U.S. technology, transactions involving exports paid for in U.S. dollars and whether a company with Russian connections should proceed with an initial public offering. Most Chinese companies have taken action to avoid violating sanctions, the lawyer said, with measures including adjustments to internal compliance programs, changing suppliers or terminating contracts.

Overall, U.S. officials have said there is little evidence to show China is circumventing American sanctions, amid near-daily warnings from the White House and officials in Europe.

President Joe Biden this week reiterated his warning to President Xi Jinping that “he’d be putting himself at significant jeopardy” if he helped Putin, while also saying the U.S. and its allies discussed ways to monitor “who has violated any of the sanctions and where and when and how they violated them.”

U.S. national security adviser Jake Sullivan told reporters traveling with Biden to Brussels for meetings this week with allies that China and other nations have been warned against “systematic efforts to undermine, weaken or circumvent the sanctions regime that we have put in place.”

U.S. Treasury Secretary Janet Yellen said Friday that sanctions on China aren’t “necessary or appropriate at this point.” She told CNBC that “we would be very concerned if they were to supply weapons to Russia or try to evade the sanctions we’ve put in place on the Russian financial system and the central bank. We don’t see that happening at this point, and it’s really up to China to make sure they understand the complex situation they face.”

China — which has urged an end to the war in Ukraine but refuses to criticize Russia’s continuing invasion — has vowed to maintain “normal” trade relations with Russia.

Speculation over U.S. sanctions contributed to a plunge in Chinese stocks earlier this month, prompting Foreign Minister Wang Yi to declare that China “is not a party to the crisis, nor does it want the sanctions to affect China.” Beijing also has denied giving military assistance to Russia, another flashpoint for the U.S. that would risk escalating tensions between the world’s biggest economies just as Xi looks to minimize disruption as he prepares to prolong his 10-year rule at a party congress later this year.

Chinese officials say they reject on principle the need to respect sanctions on Russia and other countries that don’t have the endorsement of a United Nations resolution. In practice, though, Chinese companies have shown a willingness to comply with American sanctions toward Russia, North Korea and even Hong Kong — a Chinese territory — in order to avoid losing access to the global financial system.

“Chinese companies will comply with U.S. sanctions but they probably won’t say it, because that’s just bad publicity within the Chinese market,” said Ji Li, a professor focused on U.S.-China business law at the University of California’s Irvine School of Law. “They don’t want to appear as being obedient to U.S. demands.”

Many Chinese multinational companies began to build up their internal compliance departments only in recent years to address international regulations, he said, adding that the real “wake-up call” for them came when Chinese telecommunications equipment-maker ZTE Corp. was fined $1.4 billion by the U.S. in 2017 for selling American technology to Iran.

At least two of China’s largest state-owned banks restricted financing for purchases of Russian commodities immediately after the Ukraine invasion, and one of them — Industrial & Commercial Bank of China Ltd. — also temporarily suspended business with high-risk clients in both Russia and Ukraine who might be hit with sanctions, according to a bank official. ICBC didn’t immediately respond to a request for comment.

In February, Russia’s biggest lender, Sberbank PJSC started allowing its users to make cross-border money transfers via Western Union to Chinese bank accounts connected to the Alipay app owned by Jack Ma’s Ant Group Co. But that option is no longer available since Western Union suspended its cooperation with Sberbank. Ant declined to comment.

Technology companies are also in the spotlight, with European Union officials suspecting that China may be ready to supply semiconductors and other tech hardware to Russia as part of an effort to soften the impact of sanctions. So far it remains unclear whether Chinese chip companies will cut Russia off. Semiconductor Manufacturing International Corp., which uses equipment from U.S. suppliers like Applied Materials Inc. to make its chips, has declined to comment.

Transactions in areas not subject to sanctions are proceeding cautiously. It was reported Friday that traders in China were sending 30,000 tons of alumina to United Co. Rusal International PJSC, the Moscow-based aluminum producer struggling to secure raw materials due to fallout from the war.

While Rusal or aluminum aren’t under sanctions, Australia banned supplies and the company’s other sources of raw materials are under pressure. Traders said the shipments were exploiting a commercial opportunity and weren’t influenced by a Chinese government directive.

China’s top envoy to Russia similarly urged Chinese executives in Moscow to “fill the void” created by the war, without mentioning sanctions. Speaking to about a dozen business heads in Russia on Sunday, Ambassador Zhang Hanhui said major companies faced disruptions in payments and it’s “a moment where private, small and midsized enterprises could play a role.”

Still, while Russia depends on China for almost 20% of its external trade, Beijing is much more reliant on the U.S. and Europe as markets for its goods. Although Xi is likely to back Putin diplomatically, the Chinese leader won’t want to further hurt an economy set to grow at the slowest pace since the 1990s, Eurasia Group said in a report this week.

“Xi’s bottom line is domestic success,” it said. “Beijing will likely continue to ensure that its ties with Moscow do not invite Western sanctions or otherwise damage China’s economic interests.”