Section 1. Russia’s international transactions under the sanctions

The results of the study helped us identify the three main circuits of foreign trade transactions carried out by the Russian businesses.

1. Transactions in rubles and currencies of “friendly”² jurisdictions
2. Transactions in currencies of “hostile”³ and transit⁴ jurisdictions
3. Alternative transaction methods

One option would be to highlight the problem of transactions with countries that have unusual foreign currency regulations (India, Vietnam, etc.), but instead, we chose not to dwell on this area, since any mechanism employed in transactions with these countries involves a combination of one of the above three transaction methods and country-specific foreign currency oversight issues.

2 — The term “friendly” jurisdictions refers to China, Iran, and most CIS countries.

3 — The term “hostile” jurisdictions refers to the countries that support the West’s sanctions policy targeting Russia. At the core of this list are the OECD member countries; however, the banking systems of many countries outside of the OECD and the anti-Russian sanctions coalition, are also “hostile” to Russia’s foreign trade aspirations.

4 — In effect, the transit of Russian payments can use the banking systems of multiple countries, including the U.S. and the E.U. However, there are national currencies and countries that feature in the transit operations more often. Above, these include Singapore, South Africa, Hong Kong, and traditional tax havens like Virgin Islands and Cayman Islands. The CIS countries, Turkey, and the UAE can be considered “friendly” for certain operations associated with Russia (similar to China) and “transit” jurisdictions for others.

Transactions in rubles and currencies of “friendly” jurisdictions

China: RUB and CNY

Over the course of the war, China has carved out a unique position both in Russian foreign trade and as a major external counterparty to the Russian financial system. In January–October 2024, transactions with China amounted to 34.6% of all Russian foreign trade (18.6% in 2021). At the same time, these transactions are increasingly associated not only with real trade between Russian and Chinese producers, but also with some products from third countries being transited to Russia via China. According to the Central Bank’s estimate, as of November 2024, 81.9% of all foreign trade transactions in Russia were made in rubles and currencies of friendly jurisdictions. In mutual transactions with China, the figure was as high as 95%. And while we dont find the assessment of the share of friendly currencies with regard to the entire Russian foreign trade particularly accurate, the data on the share of rubles and CNY in Russo–Chinese transactions seem generally plausible. Thus, Russian-Chinese transactions in rubles and CNY account for one-third of the Russian foreign trade.

Russian legal entities can open accounts with Russian or Chinese banks, and Chinese legal entities can symmetrically open ruble accounts with both Russian and Chinese banks. The number of legal entities holding such accounts had already been significant before the war started, but it has soared manifold in recent years.

In this regard, the following scheme was initially the most immune to the actions of Western regulatory authorities: a Chinese importer purchasing goods in Russia pays for them from his ruble account to the ruble account of a Russian exporter. At the same time, Chinese exporters in Russia get credited rubles from their Russian counteragents to their ruble accounts. These transactions are all done in rubles within a single banking structure. Western authorities have no access to the data on the transfer of rubles between the accounts, nor are they even aware that a certain Chinese company has a ruble account with a Russian bank.

Before moving on, we should describe the three concepts essential for subsequent elaborations: “mirror,” “mixer,” and “tail.”

“Mirror”

Suppose the volume of exports from Russia to China, paid in rubles within the Russian bank X, equals the volume of imports from China to Russia, paid in rubles within the same Russian bank X. The data on the ruble transactions is not available to Western regulators. However, even such ideal conditions do not solve the problem where the real Chinese exporters ultimately need CNY, and Chinese importers need to exchange their CNY for rubles. Most transfers between the Russian and Chinese banks can be detected by Western regulators in at least one (SWIFT system) and sometimes more ways.

To avoid being detected, in addition to ruble accounts held with the Russian bank X, the Chinese importers and exporters open “mirror” CNY accounts with the Chinese bank X1, which is somehow related to the Russian bank X (via common beneficiaries or an agreement on splitting the transfer fees). This creates two “mirror” systems: rubles circulate within the Russian bank unbeknownst to the Western regulators, while CNY circulate between the Chinese companies within the same bank, which, in most cases, is also invisible to the Western regulators. Unless there are direct transfers between the banks X and X1, the existence of a “mirror” can only be detected through indirect data using substantial investigative resources.

“Mixer”

Typically, on top of using a “mirror,” payments additionally pass through a “mixer,” that is, a bank or a group of banks where the money flows related to Russia get mixed with the other flows, both from domestic economic and foreign trade activities conducted with other countries. Once the mixing is over, it is hard to distinguish between the Russia-related money and that which has no ties to this country.

In addition to all of the above, the organization of transfers is compounded by one or a combination of the following methods:

• On both sides of the border, a whole group of banks with a wide variety of legitimate day-to-day operations are also implicated in the “mirror” and “mixer” activities. In China, these operations mostly involve multiple small banks (known as rural banks), whose reporting is barely intelligible and accessible to non-Chinese regulators.
• If a Chinese exporter or importer does not have its own RUB account, the offer is to settle the payment in CNY using a Chinese intermediary company (often this company is not only a payment agent but also provides actual transportation and customs clearance services). The intermediary pays the rubles to the Russian counteragents to complete the transaction in Russia. At the same time, the intermediary may cover its own bilateral flows in different currencies, serve as an element of the banking infrastructure at the expense of bank resources, or combine both of these components in different configurations.

All of the above repeatedly hampers the ability to detect “mirror” and “mixer” operations, let alone to legally prove their existence.

“Tail’’ problem

In real life, day-to-day CNY and ruble requirements are never aligned within an intermediary company, a single bank, or an ecosystem of related banks. Short-term deficits are tackled by having permanent liquidity balances in both rubles and CNY at both ends of the chain. However, he vast majority of the active schemes still demonstrate some structural deficit/surplus of a certain currency, which some respondents referred to as a “tail.” Various operators are forced to exchange the accumulated “tails” of excess currency for insufficient currency, which poses major risks of the scheme being uncovered by Western authorities.

At the same time, while RUB “tails” within the Russian banking system or CNY “tails” within the Chinese banking system can be addressed within the framework of interbank transactions without them having to be converted into third-country currencies, the inevitable trade deficit/surplus between Russia and any trading partner country still does not help avoid the use of third-country currencies for the final balance of operations. Typically, they still need to resort to the national currencies of “hostile” countries to deal with these “tails.”

The terms “mirror,” “mixer,” and “tail” will be used by us in this sense and also when describing the mechanisms of payments in other currencies and payment methods. “Mirrors” and “mixers” are the biggest mechanism that allows real transactions to remain invisible to Western authorities; “tails” are the biggest challenge for any “mirrors,” blowing their cover as they are being dealt with.

Now let us consider the change in the system of transactions with China as it has progressed. As of 2021, the dollar and euro accounted for 76.8% of trade between the Russian Federation and China, while the ruble accounted for 6.4%. The remaining 16,8% covered the other currencies, mostly CNY and the Hong Kong dollar. Early into the war, the share of transactions in CNY grew rapidly, with a slew of CNY accounts opened for the Russian banks by Russian banks and less frequently by Chinese banks. The share of ruble transactions was also growing at this point, but Chinese businesses were less interested in switching to RUB transactions than Russian businesses were in switching to CNY.

As the share of CNY transactions grew, there was a flurry of currency exchange operations and transfers between the Russian and Chinese banks. The need to create sustainable “mirrors” was minimal. Beginning in 2023 and especially in the summer of 2024, the pressure of the U.S. regulators on the Chinese banking system intensified, rendering transfers between the Russian and Chinese banks and RUB/CNY exchange transactions more expensive and risky. Businesses responded by moving more transactions to the RUB zone and the mass establishment of “mirrors.”

This swing faced a number of technical and bureaucratic constraints. Some of the problems were related to the absence of Chinese banks involved in “mirror” transactions in some regions of China or, e.g., the failure of Chinese tax authorities to deduct export VAT when paying for goods in RUB. However, a more important limitation was the number of RUB accounts that the employees of VTBShanghai, which is the Russian bank branch in China, were physically able to open for Chinese legal entities. Before the war, the branch status did not seem to be a significant advantage, but as Western pressure on the Chinese banks increased, this fact made VTB-Shanghai the largest operator of the RussianChinese transactions.

The changes in the VTB-Shanghai commission fees for transfers between Russia and China is quite noteworthy. Before the war, the commission fees for transfers to China was less than 0.2%. During the war, it crept up, peaking at 4%⁵ of the transfer amount in September 2024. The 2024 surge in fees in 2024 was caused by the mass shift of the transactions with China to the RUB zone, leading to an overflow of requests to open accounts with VTB-Shanghai, which could take months to process. Leveraging its unique market position, VTB maximized its profits by raising the commission fees. However, things gradually normalized. In December 2024, the basic fee dropped to 2.4%⁶ of the transfer amount, and the speed of RUB payments increased, while the waiting times required to open an account almost returned to the pre-war levels (*).

5 — On top of the transfer fee, the bank charges extra for foreign currency monitoring and the difference between the bank and the Central Bank’s rate (a total of up to 1.5%). Amid transfer disruptions and peak demand periods, VTB-Shanghai also charged a payment acceleration fee of up to 5%. Thus, at peak times, aggregated losses could be in excess of 10% of the transfer amount. But this was reported by several respondents (*); this dynamic did not last longer than a month.

6 — According to respondents, the December 2024 dip in commission fees was caused by certain businesses rerouting their payments toward cheaper banks. I.e., a 4% fee exceed the market values.

By late 2024, most transactions with China, both in RUB and CNY, had shifted to the “mirror” transaction model, with a steadily decreasing volume of direct transfers betweenthe Chinese and Russian banks and direct currency exchange transactions. At the same time, a sizable portion of technical and bureaucratic issues that stunted the transfers in mid-2024 was somehow fixed.

1.1.2 The ruble and “friendly” currencies in transactions with other countries

Most of Russia’s transactions with CIS countries, Turkey, and Iran tend to follow a “Chinese” scenario. The authors have no data on the mechanisms of transactions with North Korea, Cuba, and African countries all of which Russia considers friendly, but there is every reason to believe that they follow a similar pattern, too. As for India, Southeast Asia, and the UAE, the “Chinese” scheme is used for a smaller part of transactions, while most transactions are aligned with the logic described in Paragraph 1.2 below.

The main difference between Turkey and the CIS, on the one hand, and China, on the other, is that the transit of goods from third countries through China and transactions with the third countries accounts for less than 20%—possibly even less than 10%—of the real trade turnover between Russia and China. Meanwhile, transit transactions with some CIS countries sometimes exceeded the number of real trade transactions by hundreds of percentage points, and for Turkey, they amounted to up to 50%.

In this regard, the transaction dynamic with these countries was much less stable than in transactions with China and repeatedly exhibited swings caused both by the pressure exercised by Western countries and the actions of these countries’ regulators. Despite this, the general trend was similar to that of Chinarelated trade patterns. 2022 saw the prevalence of relatively simple exchange transactions when transactions for imports to Russia, e.g., from Turkey, involved Turkish liras, which were exchanged for dollars or euros inside Turkey and sent in payment for goods that were formally exported from third countries to Turkey, but Russia was the target recipient. As Western regulators stepped up the pressure, the share of exchange and linear transactions diminished, while the share of transactions using multi-stage schemes and “mirrors” rose.

According to the respondents, the number of foreign companies holding RUB accounts with the Russian banks has multiplied. Russian companies are also extensively opening accounts in “friendly” and “transit” countries in these countries’ national currencies. Transactions in dollars and euros have been replaced by transactions in liras, dirhams, and manats.

1.2 Transactions in “unfriendly” currencies

1.2.1 A sizable part of transactions made in “unfriendly” currencies follows the pattern it did “before the war” through the Russians banks that had not been sanctioned.

The analysis of the E.U. and U.S. sanctions package rulings shows that a wide range of transactions and goods have never been subject to restrictions. Formally, these transactions may still be pursued. But they are often impeded by the banks’ regulatory compliance departments that opt to halt any transactions involving Russia instead of scrutinizing those on a case-by-case basis. However, there are exceptions where transactions are still being carried out “the way they were in 2021.”

1.2.2 There are specialized intermediaries with a network of legal entities in various Western and third-world countries.

These look like third-country exporters or importers that work with the real countragents of Russian businesses abroad. Their accounts are used to pay for imported goods and to accept payments for Russian exports. In other words, Russian export revenues are kept with accounts outside of Russia, which are used pay for the Russian imports.

In Russia, intermediary legal entities registered in transit countries accept RUB payments from Russian importers to their RUB accounts and pay exporters in rubles for exported goods (export VAT is still deductible). The intermediaries’ services are used mainly by small and medium-sized businesses that prefer to operate legally.

1.2.3 Large businesses use some kind of an informal currency exchange market outside of Russia.

It works roughly as follows. Treasuries of large unsanctioned Russian exporters keep up to 80% of export revenues in “unfriendly” currencies in accounts abroad (**). When these companies need rubles in Russia, the treasuries put a certain amount of currency up for sale. This information is spread within a small range of Russian companies consisting of large importers, large Russian banks, and the large intermediaries described in Paragraph 1.2.2.

The transfer scheme itself is similar to the one described above. In Russia, an exporter accepts rubles from, e.g., a large retailer. At the same time, the exporter’s foreign account is used to pay for that retailer’s import purchases. An important difference in this example is that there is some kind of a currency exchange market intended for a narrow circle. Its exchange rate often differs markedly from the Central Bank rate (**). In a sense, this rate better reflects the real effective exchange rate for Russian foreign trade. The general rule is that currency buyers pay exporters a surcharge in relation to the Central Bank rate and conditions in Russia. The surcharge amount varies considerably. Typically, it falls between 1.5% and 2%, but occasionally, the surcharge hovered around 5% and even reached 10% (*). In other words, this is the way for large exporters to gain additional income, while importers overpay for foreign currency in relation to the Central Bank exchange rate.

1.2.4 In addition to the above, there are many individual schemes and solutions.

If a finance and industry group entails both export and import businesses (e.g., oil export and retail), this group builds exchange flows internally. Independent exporters and importers build their cooperation in similar fashion. In all the described cases, transactions are “mirrored” separately. “Unfriendly” currencies are circulated in the external circuit, while rubles are circulated within Russia without direct transactions between the circuits.

1.4 Remarks on the overall impact of the sanctions

1.4.1 Effects of businesses charged with overseeing the sanctions compliance

As the respondents were being interviewed on the international transactions and the customs transit of goods, which was outside the study scope yet mentioned by the interviewees, almost none of the subjects brought up the challenges caused by the official structures and agencies of the E.U. and the U.S.

The actual challenges were mostly prompted by the Western banks and business counteragents that were consistently active in hindering the payments or sales transactions. If an E.U. supplier exerts an effort to monitor the end use of their products, circumventing this policy becomes either too expensive or altogether unfeasible. However, if a supplier is flippant about such efforts, according to the respondents, the Western customs offices and law enforcement alike were nothing to worry about, including when it came to exporting dual-use items from the E.U. to Russia.

Clearly, charging the banks and businesses with overseeing the validity of payments and the products’ end use is a deliberate strategy employed by the Western regulators, and potential secondary sanctions have become a major tool to enforce the sanctions policy. On the one hand, it proves efficient, but on the other, it has the following by-effects.

Unlike the offciails, the companies and banks’ compliance departments have a tendency for a broader interpretation of any bans and restrictions. Unlike the government agencies, the private individuals’ refusal to carry out transactions may not be challenged in court. But apparently, both the business executives and compliance officers find it easier and more convenient to halt any transactions with a sanctioned country than having to scrutinize the products’ use and the legitimacy of payments.

In this context, any tactics designed by government agencies to fine-tune the sanctions policy lose their efficiency. One can legislate multiple export rules for various types of products and make humanitarian exceptions for certain goods (e.g., food items) while pursuing the restrictions on other products more aggressively. But practically speaking, for specific multi-product exporters, the rising costs are comparable, if not identical. Therefore, a regulator’s options are basically limited to a non-selective switch: either clamp down on trade and transactions with country X or lift it altogether.

This conundrum foils the concerted effort to target the primary products and transactions sought to be sanctioned by the international coalition. If dozens of thousands of businesses are looking for ways to bypass the restrictions all at once, it spawns thousands of intermediaries that are impossible to monitor. The transit of the top-priority sanctioned goods and the top-priority transactions to be hunted down are overwhelmed by the sheer number of operations, which makes them both cheaper and safer.

This practice directly increases the costs for bona fide businesses while lowering them for illegitimate players, which may have long-term adverse repercussions for the operations of the institutions.

1.4.2 Scheme prevalence dynamic

Asked about the changing dynamic in the payments market starting in 2022, the respondents invariably pointed to the same pattern whether it regarded the RUB transactions with China or foreign currency transactions made via transit jurisdictions.

Initially, the shutdown of the transaction channels that are fully controlled by Western countries leads to the transfer of trade turnovers to the pre-existing convenient channels of transactions in third countries; importantly, the E.U and the U.S. are at least aware of the transfers conducted in these countries. At the second stage, citing this data, the West forces the shutdown of these convenient transaction channels. After that, the transactions migrate to channels the West has no data on. These channels can be built from scratch. Alternatively, they require a vast expansion of the pre-existing ones, so they are initially inconvenient and very expensive. Finally, these new channels become increasingly efficient and cheap. Even though they are more expensive than the transactions using the modern Western financial system, the range of fees is between 2% and 4% at worst, and businesses find these avenues both convenient and reliable.

During this transition, the costs for the Russian businesses and economy climbed before arguably peaking in the summer and fall of 2024. They have been declining ever since. On the other hand, while initially, the structure of Russian foreign transactions was fully transparent and controlled by the West, the mass transition to the “mirrors” has been stripping the West of any conventional (apart from the resources of intelligence agencies) sources of information on the volume and direction of flows using the new payment channels.

In fairness, the transaction systems the West was oblivious to were around even before the Russian sanctions became a thing. However, those were too expensive and precarious for regular business operations. Sanctioning a country with an annual trade turnover of $600B to $800B spurred a landscape where these channels became cheaper and, by all accounts, more acceptable for regular business operations.

Extrapolating the observed trends, the most likely further trajectory, we argue, will combine two processes.

• On the one hand, the RUB transaction circuit will be continuously expanding, with costs dropping back to the pre-war or almost pre-war levels. On top of China and India, VTB operates in other Kremlin-affiliated countries from Vietnam to Angola, including the entire CIS. Recently, the word was out that the bank had scheduled an upcoming launch of an Iranian branch. One possibility is that over time, some transactions within the Iranian–Chinese trade turnover will be paid for in rubles using the VTB system. The obvious reason is that the large turnovers of the RussianChinese trade make for a cheaper, more convenient, and “West-immune” transaction system than the trade between Iran and China can offer.
• On the other hand, this ruble-based core of the payment system will be surrounded by a variety of “mirrors” using CNY, dirhams, liras, and cryptocurrencies. Since these “mirrors” will be constantly jeopardized by the sanctions, with some eventually affected and others having to be rebuilt, the maximum size of such systems will be limited. This means the cost of their services cannot drop. After all, each such operator has their own costs and, inevitably, their own “tails” where the smaller those are, the costlier they are to tackle.

1.4.3. The speed of transition to alternative transaction systems is only limited by the infrastructure as opposed to the regulator policy

Initially, the authors of the study hypothesized the cost of the cross-border transfers to be fluctuating based on the new steps taken by the E.U. and the U.S. We even considered identifying the time it took for the payment costs to bounce back to the previous level upon the introduction of a new round of restrictions. However, we failed to establish any correlation between the new steps undertaken by the Western regulators and the transfer costs. Except the summer and fall of 2024 proved to be a more challenging period than 2023 and late 2024. a more cogent perspective, though, would encompass the other two effects.

• Respondents mentioned very different points in time when the payment situation deteriorated for them compared with the pre-war period. Some faced problems and restructured as early as spring 2022. Most respondents did so in 2023. Some interviewees said they continued to operate “as in 2021” until the spring and summer of 2024. Most real-sector representatives experienced a one-time change in the arrangement and cost of transfers; later, the costs showed no significant fluctuations. As for the cross-border transfer operators, they were being impacted by constant and chaotic changes, but this affected their profits rather than the commission fees for end customers.
• The fluctuations in the commission fees mentioned by the respondents were mostly related to domestic events and physical constraints on the rates of creating a new infrastructure. This primarily included the overloaded VTB-Shanghai employees in 2024 and, curiously, a surge in commission fees on cash-to-cryptocurrency transfers early into the corruption scandal involving the Ministry of Defense. To quote from the respondents (**), “the generals rushed to convert their bagloads of cash into the cryptocurrencies.”

The above set of observations suggests that the new steps attempted by the Western regulators would typically serve to expand the pool of Russian participants in foreign economic activity forced to use the bypass schemes, but it failed to significantly affect the cost of such schemes. If this assumption is correct, once all Russian-related transactions translate into the “mirror” schemes that are beyond the reach of Western agencies, their cost will only be decreasing further spurred by the competition. The point where the costs would trend downward may have already arrived in late 2024. According to two respondents, they transitioned to the cheaper payment methods than that offered by VTB-Shanghai at the time the commission fees hit an all-time high, only to switch back to the VTB-Shanghai-mediated transaction once the commission fees went down.