Russian Dependence on Chinese Yuan Exposes New Challenges Amid Sanctions

After the United States and its allies imposed sanctions on Russia in 2022 for its invasion of Ukrne, Moscow shifted away from reliance on the U.S. dollar and euro in international transactions. Instead, it turned towards China's yuan as a means to conduct trade.

This shift coincided with an increase in bilateral trade between Russia and China following Russia's exclusion from Western markets and the global financial system due to sanctions. By June, the yuan represented almost all of Russia's foreign exchange market transactions 99.6, according to Bloomberg data based on information provided by Russia's central bank. Russian commercial banks also ramped up corporate loans in yuan as an alternative.

However, this increased depence on the yuan is now causing difficulties for top Russian banks. German Gref, CEO of Sberbank, Russia's largest ler, sd at an economic conference that the bank cannot l in yuan since they lack the necessary liquidity to cover foreign currency positions.

The problem arose due to the U.S.'s expansion of its definition of military-industrial sector earlier this year. This broadened scope allowed for secondary sanctions agnst Chinese firms doing business with Russia, causing Chinese banks to become cautious about transferring yuan funds to their Russian counterparts when handling foreign trade payments.

As a result, Russian companies have been relying on China's central bank for yuan through currency swaps since the beginning of this month in one instance, rsing a record amount of 35 billion yuan. Banks were expecting even more assistance from the central bank in addressing liquidity concerns related to yuan funding.

However, Russia’s central bank is reportedly advising banks to limit corporate loans denominated in yuan, stating that currency swap facilities are primarily for short-term stabilization and are not meant as long-term funding sources.

The report also highlights concerns among Russian exporters about a quarter of whom have faced difficulties with foreign counterparties, including blocked or returned payments even when transactions were conducted through what would typically be considered frily countries. The survey indicated that these issues worsened from the first to the second quarter this year.

In , Russia's strategy to rely more on China’s yuan has encountered challenges due to uncertnties around Chinese banks' willingness to engage in currency transfers and liquidity constrnts faced by Russian banks. This highlights ongoing complexities in navigating global trade relations under sanctions and economic pressures.
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