Page 11 - bne IntelliNews monthly magazine April 2025
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    bne April 2025 Companies & Markets I 11
  a rather panicked Vladimir Chistyukhin, first deputy governor, exclaimed that the only solution was to turn to cryptocurrencies, and the Kremlin spent the rest of the year rushing out a raft of legislation to underpin a digital ruble regime, culminating in the first tests of settling international trade deals using cryptocurrency in the summer and
Russian President Vladimir Putin showcasing the BRICS
Pay cryptocurrency at the BRICS summit in Kazakh in the autumn. But using cryptocurrency to replace the dollar,
even amongst willing friendly countries, is still years away.
Economic warfare and rise of shadow finance
In the meantime, the Kremlin has no choice but to continue to develop its shadow finance regime akin to the shadow fleet of tankers it has developed to avoid the oil price cap sanctions on oil exports.
Sanctions have long been wielded as a tool of economic warfare, designed to isolate countries from global financial systems and limit their ability to trade. The Western sanc- tions imposed on Russia following its invasion of Ukraine aimed to cripple its economy, yet, despite these measures, Russian trade did not collapse. Indeed, it flourished. Russia ran the biggest current account surplus of all-time in 2022 of over $250bn – twice the size of the previous record set only a year earlier in 2021. But the new strangulation sanc- tions are taking an increasing toll and that surplus shrank to $51bn in 2024, although it will likely stay at the same level this year.
According to a recent report by the Centre for Analysis and Strategies in Europe (CASE), Russian businesses have shifted much of their international trade to alternative settlement systems. Traditional banking transactions have become fraught with risk as Western financial institutions self-impose restrictions beyond legal mandates, avoiding any association with Russian-linked transactions.
“The increased complexity of international settlements caused by the sanctions has led to a surge in transaction costs for Russian businesses,” the report notes.
This has forced companies to turn to three primary methods for financial transactions: payments in rubles and "friendly" currencies, settlements in "unfriendly" currencies via inter- mediaries, and alternative systems including cryptocurren- cies and informal networks.
By late 2024, an estimated 81.9% of Russian foreign trade was conducted in rubles or currencies from "friendly" nations, including China, Iran and Turkey. In trade with China alone, settlements in the yuan and ruble now account for 95% of transactions.
Whack-a-mole
International settlements have turned into a global game of whack-a-mole. OFAC has become adept at unearthing the Russian payment scams and closing them down. But Russia,
and its partners in places like China, has become equally adept at working out new schemes to keep the money flow- ing. As new sanctions were imposed last year trade flows would dip, but it typically took a Russian firm about four months to work out a new scheme for getting paid and for the flows to recover to previous levels. Likewise, new sanctions on companies paying for Russian oil would see the discount Russia was forced to offer widen to $10-$15 a barrel for months, but as the new payment schemes came online those discounts would fall back to previous levels too.
While alternative financial systems have ensured that trade continues, they have come at a significant price. Transaction fees now exceed $10bn per year, while Russian businesses have been forced to divert an estimated $200bn into stock- piles and trade loans to mitigate supply chain disruptions, CASE repots.
This shift has also placed significant burdens on businesses. Executives who previously spent little time on financial transac- tions now dedicate up to 30% of their working hours navigating compliance hurdles and ensuring payments reach their destina- tion. One Russian importer reported that a simple transaction that once took a day to complete can now take weeks.
“The increased complexity of international settlements caused by the sanctions has led to a surge in transaction costs for Russian businesses”
The increased cost of compliance disproportionately affects small and medium-sized enterprises (SMEs), many of whom have opted to operate in the "grey economy" or cease foreign trade altogether. Large firms have adapted by developing multiple redundant payment systems, ensuring they can continue transactions even as new sanctions take effect. One large importer reported maintaining 14 independent settle- ment channels to avoid disruptions.
“For some businesses, foreign trade transactions now take 10 times longer to complete than before the war,” the report highlights.
The Role of China and the "Mirror" System
China has become the cornerstone of Russia’s new trade infra- structure. The CASE report outlines how Russian and Chinese firms have developed "mirror" and "mixer" mechanisms to obscure financial transactions from Western oversight. These involve parallel bank accounts in China and Russia that allow payments to circulate within each country’s financial system without triggering SWIFT-based alerts.
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