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Western sanctions might hinder Chinese currency from thriving in Russia

Amazing things are happening in the Russian economy. Among them is the widespread adoption of the Chinese currency. However, some experts believe that the yuan's spread in the Russian economy, fueled by disagreements with the West, has reached its peak. Countries doing business with Russia are under increasing pressure from the United States. Recently, Washington warned banks about helping Moscow. This has complicated several transactions. Nevertheless, the current situation has not significantly affected the role of the Chinese currency in the Russian economy. Moreover, the importance of the yuan in the Russian economic space has significantly increased.

The gap in overnight loan rates in yuan between Russia and China sharply widened after comments from Janet Yellen, the US Treasury Secretary. In December 2023, she stated that the White House would take decisive measures against Russian financial institutions. Since then, this difference has persisted, and Chinese state banks have tightened restrictions on financing Russian clients.

Over the past two years, Russia has surpassed Germany, Australia, and Vietnam in trade volume with China, which increased by 60%, reaching $240 billion in 2023. China benefits from buying Russian oil and other commodities at a discount, while Russia gains access to a wide range of consumer and high-tech goods.

Currently, Beijing is Moscow's main trading partner. In the existing situation, the yuan accounts for about 40% of Russia's export and import payments, as well as more than 50% of the turnover on the Russian foreign exchange market. According to Bloomberg analysts, the scale of Russia's "yuanization" is impressive. This process started almost from scratch at the beginning of 2022 and has gained momentum since then.

Bloomberg Economics estimates that the share of China's trade settled in yuan surged in the first quarter of 2024, with Russia accounting for 29% of the growth since 2021. Notably, Moscow and Beijing conduct almost all their trade in yuan, and Russia's exports in yuan exceed its sales to China.

However, fearing secondary sanctions from the US, some major Chinese banks stopped accepting yuan from Russia. This negatively affected imports, analysts note. This issue was later resolved with the help of smaller regional banks that could process payments.

“The yuan’s usage has a certain peak and it is dependent, first of all, by how much Russia will trade with China,” Alexander Gabuev, director of the Carnegie Russia Eurasia Center, said. “Also much will depend on how widespread the yuan will be as a currency for settlements with other countries,” he added.

At the beginning of this year, the Chinese currency overtook the American one in terms of deposits in Russian banks. According to experts, it has become the main foreign currency for savings in Russia. In 2023, the volume of yuan deposits in Russia doubled, reaching $68.7 billion. This is several times higher than the same indicator in leading offshore economies using the yuan, such as the United Kingdom and Singapore.

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