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.

“The US government could use secondary sanctions to go after people who are seen as circumventing the primary sanctions,” said Ben Kostrzewa, a consultant at Hogan Lovells in Hong Kong, who formerly handled US-China disputes and negotiations at the Office of the US Trade Representative. “These secondary sanctions, where there is no direct US nexus, will be a risk for Chinese companies if they engage in major transactions with restricted parties.”

Two of China’s largest state-owned banks, Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. are restricting financing for purchases of Russian commodities, especially in dollars, according to people familiar with the matter. Both are large banks with close ties to the US and European banking systems, where violation of sanctions could see their operations curtailed.

“Chinese financial institutions, particularly the large ones, they tend to act like EU and US banks do – they follow all the same sanctions programs, they have internal control structures which are very similar,” said Nick Turner, a lawyer at Steptoe & Johnson in Hong Kong who advises companies on sanctions compliance.

Chinese banks had about US$33 billion of outstanding lending to Russian entities in 2021, compared with US$56 billion of EU and U.K. bank lending, according to Natixis SA estimates based on data from the Bank for International Settlements.

Some smaller Chinese banks have made Russia a priority. Hong Kong-listed Harbin Bank said in its 2020 annual report that it had lent 8 billion yuan (US$1.3 billion) to Russian banks and had a foreign currency settlement network covering all of Russia.

The Bank of Kunlun, owned by China’s state-run China National Petroleum, which was sanctioned by the US for Iran payments in 2012 continued to facilitate trade with Iranian companies using China’s currency.

“You can easily imagine a single-purpose, stand alone bank not owned by an internationalised corporation like PetroChina,” Chen said. “Then that single purpose bank can have more freedom to do whatever.”

But even Kunlun eventually wound down its Iran operations following diplomatic pressure on Beijing. The bank said in 2018 that it would only finance sanctions-compliant trade, an Iranian official said at the time. By 2020, the bank had stopped all payments services to the country apart from humanitarian and sanctions compliant trade, according to Iranian reports.

The Bank of Kunlun didn’t immediately respond to a Bloomberg News inquiry.

The bank’s reduction of its Iran business came as China tried to ease a trade war with the US, and as the EU, China and Russia agreed on a system allowing payments to Iran.

“Some policy changes or fulfilments can be seen as positive efforts by China to contribute to international negotiations,” said Jin Sun, a researcher on Chinese sanctions compliance at Graduate Institute of International and Development Studies in Geneva.

A similar arrangement to the Bank of Kunlun in the case of Russia would be subject to international pressure, and its viability would depend on commercial considerations as well as the outcome of diplomacy between China and other major powers, he said.

Small banks would have less capital available for lending to Russia but will also be limited by worries about financial stability – an overriding priority for Beijing which has focused on the risks posed by a series of failures at small banks since 2019. If history is a guide, the response of China’s commercial banks to sanctions on Russia could be underwhelming, as following Russia’s 2014 annexation of Crimea.

“When financial sanctions were introduced, there was discussion that Chinese banks would step in and replace the funding that was lost,” said Iikka Korhonen, head of the Bank of Finland Institute for Emerging Economies, which specialises in analysis of China and Russia. “That has not happened. Chinese banks are also cautious about irritating the US”