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Changes in Russia’s policy towards allowing Foreign banks to operate in the county are in the pipeline, as growing problems with cross-border payments have forced the government and the Central Bank to agree to open branches of foreign banks in Russia. These have been strictly prohibited in recent decades.
Additionally, Russian officials are ready to lift bans on the use of cryptocurrencies in settlements, including in foreign trade. A draft law on establishing branches of foreign banks in Russia was submitted to the State Duma on July 18.
Russia has experienced a drop in imports of about 8.5% in 2024 over 2023 amid difficulties with international settlements. The threat of secondary anti-Russian sanctions has reduced the number of potential suppliers of goods from Russia, as it complicates cross-border bank payments.
Neither the Central Bank nor the government have been able to establish alternative channels for foreign trade payments at the present time, meaning that Moscow needs to develop new settlement and payment tools. Businesses are taking steps, however the government is more cautious, with both the Central Bank and the Ministry of Finance needing to build a new system of international settlements.
Payments between Russia and China in RMB Yuan for example have almost been stopped, with Chinese banks wary of US sanctions. It is also difficult for Russian companies to find alternative payment channels, including using cryptocurrencies or intermediary firms from third countries.
The proposed lifting of the long-standing ban on foreign bank branches operating in Russia is one of the attempts to overcome the crisis of foreign trade payments. Until recently, the Russian authorities allowed foreign banks to open branches in Russia, but only subsidiary banks, which had to be established only under Russian law and fully comply with all the requirements of Russian banking control.
Anatoly Aksakov, head of the State Duma Committee on the Financial market, has stated that “Since 2013, when branches of foreign banks were banned in Russia, the situation has changed significantly. Due to the sanctions in force since 2022, international payments are difficult. In such a situation, branches of foreign banks from friendly countries will help to make cross-border payments without unnecessary intermediaries.”
He said that the State Duma would urgently consider a bill on allowing the operation of branches of foreign banks. Alexey Guznov, Deputy Chairman of the Central Bank, confirmed that the bank has agreed to allow foreign banks to open branches in Russia.
In May this year, the Ministry of Finance sent a draft law on the operation of branches of foreign banks in Russia to the Central Bank and the Ministry of Economic Development. Banks of friendly countries will be allowed to open branches, but they would initially be limited to working with individual accounts.
In December 2023, the Ministry of Finance finalized the text of the draft law on the work of branches of banks of friendly countries and expanded the permissible range of securities transactions for them. The work of branches with individuals in the new version of the project was limited to money transfers.
However, in some cases, it was allowed to transfer information about such transactions to foreign banks. In addition, a ban on the involvement of payment agents is being introduced. The project also tightened a number of working conditions for branches, including a clause according to which the Bank of Russia will be able to establish requirements and assess the quality of the branch’s internal control system.
It should also be noted that the types of banks involved in establishing branches in Russia are not expected to be tier 1 or even tier 2 banks, but instead limited to regional bank with no other international exposure. Otherwise, they could be subjected to sanctions. Having no international exposure means that risk is minimised. This means that say a small provincial bank in India or China could end up becoming a specialist bank dealing exclusively with Russian transactions. Do not therefore be surprised to see banks with obscure titles such as “The Guizhou Trading Bank” or the “Simla Cooperative Bank” (neither of which actually exist) apply for branch offices in Russia.
Meanwhile, the use of the Digital Rouble, which has been recently completed trials, will not be available until 2026. Prior to introducing the currency, it is necessary to establish mutual settlement infrastructure in Russia.
These issues indicate a temporary, potentially 18 month drop in imports to Russia will occur due to payment problems. About 25% of all imports to Russia are potentially problematic, but in reality, the reduction may amount to about 10-12% of the total.
This is because a higher maximum use of currencies from friendly or neutral countries has been reached, and is now at 45.4% of export settlements, compared with 40.4% since the beginning of 2024 and considerably up from 22.2% in 2023.
Russia is also moving ahead with its domestic manufacturing capabilities as part of its State-encouraged ‘self-sufficiency’ development programme. Balancing the availability of new Russian-made products against those whose import may decline over the coming months will be a complex industrial issue.
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