The sanctions imposed by the U.S., the EU, and the UK, including the SWIFT ban, have contributed to the rouble’s rapid depreciation and are forcing Russia to seek new solutions for trade and financing. The solution that has been brought to the fore is turning to China and the yuan.
The increase of trade settlements in the yuan at the expense of the dollar is not a new phenomenon, however, the process appears to have been expedited by the current situation. The deepening of the ties between China and Russia could potentially curb the dominance of the U.S. dollar in international trade in the future.
Yuan settlements for Chinese exports to Russia were 2% in 2013, as opposed to 28% in the first half of 2021. The Ukraine crisis could further exacerbate the situation and increase Russia’s dependence on Chinese trade and the yuan. Much of this is enabled by the CIPS system.
The Chinese Cross-Border Interbank Payment System (CIPS) was launched in 2015 and provides settlement services for international yuan payments and trade. Consequently, the infrastructure necessary for increased cross-border trade between China and Russia in yuan is already in place.
While Russian banks and the trading sector definitely took a hit with the SWIFT ban, Russian manufacturers, traders, businessmen, and banks are expeditiously searching for workarounds. Russian companies are already looking to open new accounts in subsidiaries of Chinese banks in Russia.
An unnamed Chinese businessman familiar with the situation in Russia confirmed this for Reuters:
“It’s pretty simple logic. If you cannot use U.S. dollars, or euros, and the U.S. and Europe stop selling you many products, you have no other option but to turn to China. The trend is inevitable.”
One of Russia’s largest transportation and logistics companies, FESCO Transportation Group, has already instituted a policy where payments and settlements can be done in Chinese yuan. Their press release from February 28, 2022, reads:
“Regarding transactions in euros and US dollars in banks that currently are under international sanctions: the Group offers its customers various alternative options of payment, including via other banks. Customers can also pay in Chinese yuan.”
However, while turning to China and the yuan may be a solution to the trade crisis Russia is facing in the long term, it does not mean that the switch will be easy in the short term. The rouble is very volatile and has been depreciating since the start of the Ukraine conflict.
The Chinese yuan is holding strong, directly opposite some predictions at the beginning of the year. As the rouble depreciates against the dollar, it also depreciates against the yuan, which means that Russians will be paying more whichever route they go down until the rouble stabilizes.
Further, the switch to the yuan is not only limited to business and trade but is also affecting everyday Russian people. VISA and MasterCard are suspending their cards issued in Russia from working in other countries and cards issued in other countries from making payments to Russian businesses.
As a response, some Russian banks, including Russia’s largest bank Sberbank and Alfa-Bank, are reporting that they will link China’s UnionPay and Russia’s domestic Mir payment systems, which would allow holders of the co-badged cards to make payments abroad.
In total, the current crisis appears to have deepened the economic ties between Russia and China and the rouble and the yuan. Ultimately, this may be the first step in shaking the U.S. dollar’s dominance over global trade. However, the evolving crisis and the long-term repercussions on global trade are difficult to predict, even in broad terms, as the situation is continually changing.
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