Russia’s reliance on China’s yuan has become a cornerstone of its economic activities since Western sanctions heavily impacted the country’s global financial access following its invasion of Ukraine in 2022. As Moscow was cut off from the dollar and euro markets, China emerged as a vital economic partner. The yuan, China’s currency, soon became the most traded foreign currency in Russia, allowing businesses to maintain crucial trade and financial operations.
However, this vital lifeline may soon face a serious challenge. The United States, in its ongoing efforts to pressure Russia economically, has steadily expanded its sanctions. In June 2024, U.S. sanctions forced the Moscow Exchange to suspend trading in dollars and euros, while a Treasury Department license temporarily allowing some transactions will expire on October 12.
This impending deadline has created uncertainty about Russia’s access to foreign currencies, including the yuan, which has been critical for the Russian economy to stay afloat.
The concern now is that Chinese banks, which have been facilitating yuan transactions with Russia, may find themselves caught in the crossfire of U.S. sanctions. This could lead to a severe reduction or complete halt of yuan transactions. According to a source familiar with the situation, an abrupt shortage of yuan liquidity is a real possibility after October 12, with the risk of Chinese banks refusing to process payments from Russia altogether.
The Impact of U.S. Sanctions on Yuan Liquidity
Yuan liquidity in Russia has been under growing strain for some time. Earlier in 2024, the U.S. broadened its definition of Russia’s military industry, making it more difficult for Chinese companies to engage with Russian businesses without risking secondary sanctions from the West. This move made Chinese banks more cautious about facilitating yuan transfers to Russia, causing trade payments between the two nations to become increasingly delayed.
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Many Chinese banks have become hesitant to engage in transactions with their Russian counterparts, and this reluctance has left numerous deals in limbo for months. With the availability of yuan drying up, Russian businesses turned to their central bank to address the shortfall. The Bank of Russia began providing limited amounts of yuan through currency swaps to help maintain some stability in the domestic market.
However, these currency swaps were only ever intended as short-term solutions, and Russian officials have been clear that they are not a permanent source of funding. The situation became more concerning as the demand for yuan continued to outpace supply, with Russian banks borrowing billions in yuan to try and meet their foreign currency needs. But those borrowings have been sharply reduced, dropping to 15.4 billion yuan ($2.19 billion) from 35.2 billion yuan in just a few weeks in September 2024.
Russia’s largest banks, including Sberbank, have faced growing challenges. The CEO of Sberbank, Russia’s top lender, admitted at a recent economic forum that they cannot continue to lend in yuan because their foreign currency reserves are insufficient to cover their positions. This highlights the precarious nature of the situation, as Russia’s economy becomes increasingly vulnerable to external financial pressures.
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Strained Relations with Chinese Banks
The strain on yuan liquidity has been exacerbated by growing hesitancy from foreign banks, including China’s. Austria’s Raiffeisen Bank’s Russian division recently refused to process payments to China, signaling a broader trend where financial institutions are stepping back from engaging with Russia. These disruptions pose significant risks to trade between Russia and China, which has surged since 2022 as Russia sought alternatives to the Western markets it lost due to sanctions.
Without a steady supply of yuan, Russia’s ability to maintain business ties with China and other key trading partners will face significant difficulties. The lack of yuan in the Russian market could cause a chain reaction, further straining Russia’s economic activities and making it harder for businesses to pay for imports, which are already complicated by existing sanctions.
Russia’s central bank has warned that it cannot rely on the limited currency swap arrangements to provide long-term stability. The swaps, which initially provided a small amount of relief, are now insufficient to meet the growing demand for foreign currency. This has led to rising concerns that Chinese banks, fearing the consequences of secondary sanctions, may further restrict their dealings with Russia.
The potential yuan shortage comes at a critical time for the Russia’s economic activity. Russia’s wartime spending and ongoing military mobilizations have added significant pressure to the economy. While oil exports to China and India have helped offset some of the damage, the country’s economy has been weakened by rising inflation and labor shortages caused by the war effort.
Moreover, economic researchers have pointed out that Russia’s economic problems run deeper than the official data may suggest. They argue that while the defense sector has seen significant growth, consumer spending has faltered, and many Russian citizens are struggling with growing personal debt. The increased focus on military production has also taken resources away from other sectors of the economy, which are crucial for long-term growth and innovation.
A Critical Moment for Russia’s Economy
As the October 12 deadline approaches, Russia faces the possibility of losing access to one of its few remaining economic lifelines. The yuan has become essential for keeping trade flowing between Russia and China, but if U.S. sanctions push Chinese banks to stop yuan transactions, the consequences for the Russian economy could be dire.
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With Western sanctions already cutting off access to dollars and euros, the loss of the yuan could severely limit Russia’s ability to engage in international trade. Many Russian businesses would find it nearly impossible to secure the foreign currency they need to pay for imports, while domestic industries reliant on imported goods and materials would suffer further.
For now, the Bank of Russia’s ability to provide temporary solutions through currency swaps has offered some relief, but this is not a sustainable solution. Russia’s dependence on yuan liquidity from China is becoming increasingly clear, and any disruption in this supply chain would have far-reaching effects on its economy. Without a reliable source of foreign currency, Russia’s future economic stability remains uncertain.
