China-based bank freezes business with Russia and Belarus

Asian Infrastructure Investment Bank has suspended all current and pending business relating to Russia and Belarus following the outbreak of conflict in Ukraine.

The decision by the development bank threatens to strain ties between China and Russia, which are close trading partners but whose relationship has come under scrutiny following Vladimir Putin’s war in Ukraine. China is the bank’s largest shareholder, with voting rights worth 26.5 per cent.

The Beijing-based bank yesterday said it would “safeguard its financial integrity” and assess the impact of the Ukraine war on its operations and members’ economies. AIIB was founded with an official stance of political neutrality. However, its move to freeze lending to Russia and Belarus testifies to the pressure on global financial institutions to cut ties with Russian projects and individuals over the war in Ukraine.

New Development Bank, a Shanghai-based lender in Asia with much higher exposure to Russia, also announced yesterday it had put new transactions in Russia on hold in light of the conflict in Ukraine.

Earlier this week, China signalled it was ready to play a role in securing a ceasefire in Ukraine, adding that it “deplored” the outbreak of conflict in its strongest comments yet on the war.

“We the management will do our utmost to safeguard the financial integrity of AIIB, against the backdrop of the evolving economic and financial situation,” the bank said.

Russia is the third-largest shareholder in AIIB after China and India, and in October AIIB announced it would be holding its seventh annual meeting in the country. About 3 per cent of its total loan portfolio is in Russia.

AIIB made its first investment in Russia in 2019 with a $500mn loan to fund a transport and infrastructure project. Last year, it approved a €116mn project to fund improvements to Belarus’s healthcare system. However, the decision was criticised by non-governmental organisations in the country due to a political crisis under the regime of President Alexander Lukashenko who has allowed Belarus to be used as one of Russia’s launching pads for the invasion of Ukraine.

Alongside contributions from its members, AIIB, which has $100bn of capital stock, has raised cash through the bond market and has four bonds outstanding denominated in roubles that have all collapsed in value. The bank’s bond maturing in 2025 dropped from over 80 cents on the dollar two weeks ago to less than 50 cents yesterday.

Even so, analysts at S&P Global Ratings said they did not expect Russia’s war with Ukraine to impair AIIB. “It’s a very small exposure that AIIB has [to Russia],” said Alexis Smith Juvelis, an analyst with S&P.

When the bank formally began operations in 2016, it was generally viewed as a complementary financing arm for President Xi Jinping’s Belt and Road Initiative, a key global infrastructure development strategy. Its senior leadership includes former UK Treasury secretary Danny Alexander.

The AIIB attracted criticism when it said it would carry on funding projects in Myanmar after the military junta last year overthrew Aung San Suu Kyi’s administration and cracked down on protesters.

The World Bank and Asian Development Fund both suspended financing to Myanmar following the military coup and crackdown.