China's yuan has become the most traded foreign currency in Russia, particularly following the country's invasion of Ukraine in 2022, which forced Russian businesses to pivot towards the yuan for international transactions. However, recent developments indicate that this reliance may soon face significant challenges due to escalating U.S. sanctions. In June 2024, the U.S. expanded sanctions that halted dollar and euro trading, leading to a precarious situation for Russian banks and businesses that have become heavily dependent on the yuan [7025650b].
A recent survey conducted by the Bank of Communications and Renmin University's International Monetary Institute highlighted that the primary obstacle to cross-border trade settlements in yuan is the reluctance of trading partners to adopt the currency, with approximately 47.7% of surveyed enterprises citing this as a major concern [dd4b38aa]. The report also pointed out that fluctuations in the yuan's exchange rate and barriers to cross-border capital flows further complicate its use [dd4b38aa].
Despite China's efforts to internationalize the yuan, its internationalization index remains significantly lower than that of the US dollar and the euro. The yuan's share of global payments is modest, standing at just 2.77 percent compared to the dollar's over 42 percent [659aeaa8]. As Russia's reliance on the yuan grows, the potential for a liquidity crisis looms large, particularly as Raiffeisen Bank in Russia has already stopped payments to China due to a lack of available yuan [7025650b].
The situation has been exacerbated by the expiration of a Treasury Department license on October 12, 2024, which could further restrict Russian access to yuan liquidity [7025650b]. Sberbank's CEO, German Gref, has expressed concerns about the bank's inability to lend in yuan due to insufficient coverage, indicating that the yuan's liquidity is already strained [7025650b].
In September 2024, Russian banks raised a record 35 billion yuan from the central bank through swaps, but this figure has since dropped to 15.4 billion yuan, highlighting the tightening of yuan availability [7025650b]. As inflation rises due to military mobilizations and wartime spending, Yale researchers warn of a looming crisis as military expenditures crowd out productive investments [7025650b].
China's strategy to promote the yuan in cross-border trade settlements reflects its ambition to challenge the dominance of the US dollar. However, the yuan's status as a global currency faces obstacles, particularly due to China's capital controls and the ongoing geopolitical tensions that complicate international trade [dbd367c9][f7851538].
In light of U.S. sanctions on Russia, there are growing concerns in China regarding its dollar asset holdings. Chinese officials are increasingly advocating for a reduction in reliance on the dollar, despite the fact that China's financial system remains heavily dollar-dependent. Approximately 50% of China's foreign exchange reserves, estimated at $3.10 to $3.29 trillion, are held in dollars, and the country's dollar-denominated external debt exceeds $1.1 trillion [fa68d338].
The annual value of bilateral trade between Russia and China has reached $240 billion, with Chinese goods accounting for a significant portion of Russia's imports [0c44cb7f]. However, the ongoing sanctions and reluctance from other countries to accept yuan as payment for imports may limit the potential for increased yuan usage in Russia [67a256a8].
In summary, while the yuan has emerged as a vital currency for Russia amidst Western sanctions, the sustainability of this economic lifeline is now in jeopardy as liquidity issues and geopolitical pressures mount. China's push for non-dollar payment systems may be accelerated by these sanctions, but significant challenges remain for dedollarization efforts [7025650b][fa68d338].