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Finance

China's UnionPay shuns Russian banks as sanctions force caution

Bank card company forgoes new opportunities to maintain global connections

UnionPay had drawn interest in Russia as an alternative to Visa and Mastercard.   © Reuters

BEIJING -- Even as China continues to distance itself from Western sanctions, the measures are affecting business decisions by companies like China UnionPay that worry about potentially being caught in the sanctions net themselves.

The bank card services provider has refused to work with Sberbank, Russia's largest bank, and halted talks with other Russian financial institutions targeted by sanctions, forcing them to scrap plans to issue UnionPay cards, according to local media.

While UnionPay accounted for only about 1% of bank cards issued in Russia as of 2020, interest had surged after Visa and Mastercard halted services there in response to this past February's invasion of Ukraine. But the Chinese company has been reluctant to take the opportunity to expand.

The Chinese government has repeatedly asserted that normal economic and trade activity between China and Russia would continue, while criticizing the sanctions imposed by the U.S., Europe and others in response to the invasion of Ukraine. In an address last week to the Boao Forum for Asia, President Xi Jinping expressed China's opposition to the "wanton use of unilateral sanctions."

More than 80% of Chinese companies in Russia have continued business as usual there, according to a list compiled by Yale University. This stands in sharp contrast to Japan, the U.S. and Germany, where roughly 90% of businesses have exited, scaled back or suspended operations in Russia or postponed plans there.

But some in China have taken a more cautious approach. Bank of China and Industrial and Commercial Bank of China have restricted financing for Russian commodities.

"The U.S. is increasing scrutiny on Chinese financial institutions that step up business in Russia," an insider connected to China's State Council said. As Washington pushes Beijing to stop supporting Moscow, it is dangling the threat of economic consequences for companies that operate there.

Being cut off from international payments networks would be painful for Chinese banks. Nearly 80% of the world's cross-border transactions are handled in dollars or euros, with just 2% in yuan. These companies are likely weighing the potential profits from continuing or expanding business in Russia against the risk of sanctions -- and deciding it is not worth the possible costs.

Even if banks are not directly hit with Western sanctions, they could still face heavy losses in the event of protracted economic or financial turmoil in Russia. The China-led Asian Infrastructure Investment Bank froze all activity related to Russia and Belarus in early March to "safeguard the financial integrity" of the institution.

Beyond the financial sector, drone maker DJI Technology said Tuesday that it would temporarily halt business in Russia and Ukraine pending a compliance review. The company has raised concerns about its drones, which it says are for civilian use only, being employed in combat.

China's state-run Sinopec Group has reportedly suspended talks with Russian petrochemical company Sibur on a joint venture, including discussion of up to a $500 million investment in a new petrochemical plant, amid sanctions-related risks.

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