For the first time in 30 years, Russia and China have returned to barter trade agreements as Russia has increasing problems making international payments thanks to the US “strangulation sanctions”.

Barter deals were widespread in the 1990s during Russia’s “virtual economy” days following its complete economic collapse in the wake of the end of the Soviet Union, when the payments and settlements system ceased functioning.

Since December, the US has changed tactics and is increasingly focusing on individual banks, threatening them with secondary sanctions that has led to major Chinese and Turkish banks cutting ties with Russia, making settling trade deals increasingly difficult.

Already at the end of the first quarter, Russia faced a drop in imports from almost all directions, and supplies from Turkey to Russia fell by a third in that period.

The situation has been further aggravated by the EU, which effectively placed responsibility for compliance with sanctions on European manufacturers in the fourteenth sanctions package, after which it became more difficult for them to hide behind ignorance of the final destination of re-exports.

A return to cash-less barter is a way to bypass the US-controlled SWIFT sanctions that were imposed only days after Russia’s invasion of Ukraine in February 2022, as well as limiting currency risks, according to multiple sources. The first such transaction could take place as early as this autumn, The Bell reports.

There is no direct payment mechanism between the Russian and Chinese analogues to SWIFT. There is no IT gateway that could link these two systems, Reuters reports. A BRICS Bridge payment system is also in the works, as emerging markets in general are interested in setting up alternative payments systems after the US weaponised the dollar in its clash with Russia, but that is not expected to come online until 2028 at the earliest, Reuters reports.

The barter agreements, which were common between the two countries before the collapse of the Soviet Union and into the 1990s, are being discussed as a solution to ongoing payment difficulties resulting from Western sanctions. Russian President Vladimir Putin met with Chinese President Xi Jinping in May for a three-day summit where counteracting US sanctions on mutual payments featured high on the agenda.

A senior manager at a large Russian bank confirmed to The Bell that a barter scheme is in preparation, though they declined to provide specific details. Another source, who works in the payments sector, mentioned that discussions are underway regarding an agreement to export food products from Russia to China as part of the barter arrangement.

China has become Russia’s biggest trade partner and reported that mutual trade has risen to $136bn in the first half of this year, on course to overtake last year’s record level of $240bn trade turnover between the partners. In addition to boosting its imports of Russian oil, China has thrown open its markets to Russia for multiple products that were previously restricted.

The volume of Chinese-Russian trade in January-July amounted to $136.67bn, which is an increase of 1.6% year on year, the General Administration of Customs of the People's Republic of China (GACC) reported this month.

According to GACC, in the reporting period, imports of goods from Russia increased by 3.9% to $75.03bn. Exports from China to Russia, on the contrary, decreased by 1.1%, to $61.64bn. The positive balance of Russia grew by 48% y/y to $13.39bn, which is unusual, as China is usually careful to maintain an equitable trade balance with its partners.

In addition to food products, sources indicate that the barter trade could include the export of metals from Russia in exchange for machinery from China.

While work-arounds such as using small regional Chinese banks have emerged that are not exposed to the US market and so harder to sanction, these methods have not fully resolved the payment challenges faced by the two countries.

Western sanctions are creating more and more difficulties in Russian trade with its main partners. After the US threatened sanctions against Chinese banks, Russia began to experience a yuan deficit, which is a problem, as Russia has dumped the dollar entirely and adopted the yuan as the foreign exchange of choice in a yuanisation of its economy.

Chinese banks are now refusing to provide Russian banks with yuan liquidity and the Central Bank of Russia (CBR) has had to take over this role. Half of the central bank’s non-frozen currency reserves of around $300bn are made up of yuan, with most of the rest as monetary gold. The deficit led to a multiple increase in interbank loan rates. The situation with yuan liquidity has worsened in the last few months and has become "quite difficult", The Bell reports.

Next in line is Turkey, which also recently received a stern reprimand from the US for trading with Russia. Ankara was told that it must either curb its trade in American-origin chips and other parts vital to Russia’s war machine, “or face consequences,” the State Department said. Turkey ranks as the world’s second-biggest source of “high-priority” goods to Russia, behind China.

The Russian government is already recommending that businesses switch to barter schemes in the spirit of the 90s in relations with foreign partners to avoid problems.

In parallel, Russia is working hard to develop cryptocurrency and digital currency payments systems as a work-around.