One of the biggest problems Russia is currently facing is

 managing its foreign trade transactions. The country’s main

 banks have been cut off from SWIFT; the number of

 transborder transaction channels has decreased drastically;

 and it has become much harder to conduct transactions in

 dollars and euros. The government is being forced to look for

 new ways to get paid for Russia’s exports and to pay for

 imports.


The authorities and businesses have tried switching to

 national currency transactions, barter deals, cash payments,

 and other schemes, but were unable to find a comprehensive

 solution in 2022. Efforts have now clearly shifted to

 cryptocurrencies and yuan payments, which means the

 Russian economy will grow increasingly dependent on the

 Chinese currency, with all the risks such a shift entails.


Even before the war, Russia’s central bank aimed to reduce

 the country’s dependence on Western currencies, particularly

 the U.S. dollar. The invasion and subsequent sanctions have

 forced Russian financial officials to accelerate those efforts: in

 the third quarter of 2022, the proportion of foreign currency in

 the Russian banking system fell to an all-time low of 15

 percent. In nine months, the share of dollar and euro

 transactions on the Russian market declined from 52 percent

 to 34 percent and from 35 percent to 19 percent, respectively.

 They have been replaced by ruble and yuan payments, which

 have seen respective increases of 12.3 percent to 32.4

 percent and 0.4 percent to 14 percent. The yuan’s share in

 stock market trading has also skyrocketed: from 3 percent to 33 percent.


From January 13 to February 6, the Finance Ministry plans to

 sell foreign currency worth 54.5 billion rubles by tapping into

 its 3.1-trillion-ruble reserves of yuan liquid assets, which

 make up over 40 percent of distributable liquid assets in the

 National Wealth Fund. It’s still an insignificant sum, which

 amounts to less than 3 percent in Russia’s yuan circulation in

 the last three months. Nevertheless, it will mean reduced

 volatility for the ruble.


The Finance Ministry also revised the structure of the National

 Wealth Fund currency component at the end of 2022,

 doubling its yuan share to 60 percent. Any surplus oil and gas

 revenues in 2023 will be accumulated in yuan. The de-

dollarization of the economy, which the Russian authorities

 are so proud of, essentially translates into “yuanization.”

 Russia is drifting toward a yuan currency zone, swapping its

 dollar dependence for reliance on the yuan.


This is hardly a reliable substitution: now Russian reserves

 and payments will be influenced by the policies of the

 Chinese Communist Party and the People’s Bank of China.

 Should relations between the two countries deteriorate,

 Russia may face reserve losses and payment disruptions.


It’s believed that the yuan can’t become a full-fledged reserve currency because of the current restrictions on capital

 transactions in China. It constitutes just 3 percent of global

 currency reserves, overshadowed by the dollar (60 percent)

 and the euro (20 percent). But Russia’s growing dependence

 on the yuan is helping the Chinese authorities to make it into

 an international reserve currency. Last October,

 Russia became the fourth largest offshore trading center for

 yuan, though back in April it wasn’t even in the top fifteen for 

offshore yuan users.



Russian politicians often mistakenly claim that the yuan’s

 international expansion foreshadows the dollar’s collapse. In

 fact, higher yuan internationalization means that the Chinese

 government needs more dollar reserves. The Chinese

 authorities need the U.S. currency to support the yuan’s

 stability on offshore markets, primarily in Hong Kong.

 Accordingly, the yuan’s strength as a reserve currency

 doesn’t weaken the dollar; rather, the two currencies

 complement each other. This means that Beijing can’t really

 help Moscow in its crusade against the dollar.


Russian-Chinese cooperation on cryptocurrencies will also

 intensify. Right now, Russia is just testing cryptocurrency

 payments for foreign trade transactions, but the central bank

 plans to develop a model for transborder payments using the

 digital ruble (a central bank digital currency, or CBDC) this

 year. There are two options on the table: bilateral agreements

 on integrating CBDC platforms, or connecting the country to

 a unified integrated platform.


The first option has a more specific focus, on using the digital

 ruble to make transborder payments. In this case,

 international agreements could impose limitations on the

 payments’ purpose and amount. Under the second option,

 the platform would have common standards and

 communications protocols, and that’s what less CBDC-

advanced states will adhere to. This second option is quite

 risky, as foreign fiat-currency-pegged CBDC may attract

 countries with unstable inflation and currency exchange

 rates.


Whichever option Russia chooses, China is the only possible

 partner. The country’s digital transactions through the Alipay

 and WeChat Pay platforms reached 166.1 trillion yuan in

 2019 ($23.8 trillion). In addition, China has been testing the

 CBDC E-CNY prototype as the third form of money to be

 used inside the country. As of the fall of 2022, about 140

 million Chinese people had E-CNY digital wallets, and their

 transactions exceeded 62 billion yuan ($9 billion). As the

 more technologically advanced party, Beijing is likely to

 establish its own rules for the platform, relegating Moscow to

 a less important position.


Russian leaders like to emphasize the unprecedented

 strategic cooperation between the two countries. Yet in reality,

 this cooperation makes Moscow increasingly dependent on

 Beijing.


Russia offers a fairly liquid market for Chinese goods, and

 Western sanctions have made Beijing Russia’s main trade

 partner. Chinese companies are joining parallel import

 programs, trying to replace the Western companies that have

 left the Russian market. Eleven out of fourteen brands on the

 Russian automobile market are Chinese, for example.

 Chinese products accounted for 40 percent of Russian

 imports of goods at the end of 2020, and only North Korea is

 more dependent on Chinese imports now than Russia. In

 addition, the Chinese UnionPay system is the only way

 Russians can use bank cards overseas.



Contrary to Moscow’s expectations, China has failed to help

 Russia circumvent sanctions. While not joining the sanctions,

 Beijing has complied with them. In the future, Russia’s

 economic dependence on China will only grow, meaning the

 Kremlin will be forced to reckon with China’s geoeconomic

 interests, often to its own detriment.

By:
  • Alexandra Prokopenko