Russians would ‘give right arm’ for US dollars

 

China-Russia trade surge lifts yuan use, but Russians would ‘give right arm’ for US dollars

• China’s total exports to Russia grew to US$76.12 billion in 2022, representing an increase of over 12 per cent compared to a year earlier
• Russia’s economy has been hit by Western sanctions as a result of its invasion of Ukraine, resulting in an increased use of the yuan

Trade between China and Russia has grown significantly, catapulting the yuan to become a regional reserve currency for Moscow, but analysts said it will not help significantly internationlise its use as the move is “a sign of its desperation” with “no use” in everyday life in the largest country in the world.

Russia’s economy has been hit by Western sanctions as a result of its invasion of Ukraine, resulting in a broader use of the yuan after the Washington-led curbs restricted access to the US dollar.

President Xi Jinping and his Russian counterpart, Vladimir Putin, signed a joint statement promising deeper financial cooperation this week, but the use of the yuan is seen to be limited to one-way trade despite an increase in commercial activities.

“Recently, our Russian customers have begun paying us in yuan, before it was often the US dollar,” said Will Liu, a marketing manager for a Guangdong-based medical device exporter.

 

Receiving payment in the yuan is a huge advantage for smaller exporters like Liu, who focuses on the Commonwealth of Independent States – that includes the likes of Russia, Uzbekistan, Kazakhstan and Azerbaijan – and South American markets, as they are often exposed to foreign exchange risks that can increase costs.

Steve Xie, a Zhejiang-based fabric exporter, said that there were some payment difficulties last year from his Russian customers, but it has since returned to normal.

“Right now, it’s a lot quicker and convenient, because it’s now paid in yuan. What’s more, there’s more demand from our customers. Other than fabrics, they want to order fruits, vegetables, and canned meat,” Xie said.

“We thought, why not? We helped them to get the goods and transported them to Erenhot port,” added Xie, referring to the land port on the China-Mongolia border.

Mark Sobel, US chairman of the Official Monetary and Financial Institutions Forum, said Russia’s use of the yuan is “a sign of its desperation”.

“Russia’s increased use of the yuan will likely have extremely little impact on global monetary trends. China is a large global trader, highly integrated with the global economy; it’s too smart to let its relationship with Russia spoil that,” said Sobel, who worked for the US Department of the Treasury for nearly four decades.

“Even if the yuan’s role in trade settlement in the region rises, the yuan’s global usage will continue to remain extremely limited given the lack of openness and convertibility as well as the presence of a plethora of capital controls, in addition to investor scepticism about Chinese protections for property rights.”

On Tuesday, Xi and Putin promised “smooth settlement” between economic entities, while the joint statement also included “supporting the expansion of the use of local currency in bilateral trade, investment, credit and other economic and trade activities”.

Russia is already getting significant use out of the yuan following a wave of US-led financial sanctions against Moscow, including having nearly half of its foreign currency reserves frozen and the removal of major Russian banks from interbank messaging service Swift, that facilitates international payments.

Rory Green, chief China economist at London-based research firm TS Lombard, estimated that offshore yuan use in Russia jumped from less than 0.26 per cent in 2020 to 2.57 per cent as of January, making Moscow the fifth biggest global foreign exchange trading hub after Hong Kong, Britain, Singapore and the United States.

Russia’s state-owned gas giant Gazprom said in September that it had signed agreements with China National Petroleum Corporation to settle payments for Russian gas supplies to China in roubles and yuan, a move that is seen to diversify from the US dollar.

Other Russian companies, such as its largest gold producer Polyus, also began to borrow in yuan in the bond market.

“It is certainly helping to internationalise the yuan. Greater Russian usage of the yuan widens the potential pool trading partners. So too does the US use of dollar sanctions increase demand for the yuan as a reserve currency,” Green added.

“However, it will not help liberalise the yuan or alter its convertibility – that is ultimately a political-economic decision to be made in Beijing.”

Green pointed out the bigger shift in terms of trade, with a much higher share of cross border transactions denominated in yuan and a greater use of yuan for trade financing.

China’s total exports to Russia grew to US$76.12 billion in 2022 from US$67.57 billion a year earlier, while imports from Russia grew to US$114.15 billion in 2022 from US$79.32 billion in 2021, according to Chinese customs data.

The yuan is growing in significance for practical purposes, though it’s highly likely Russian citizens and firms would still give their right arm to get access to US dollars, rather than yuan George Magnus

“There’s no question the yuan has become a regional currency for Moscow,” said George Magnus, a research associate at Oxford University’s China Centre.

“For Russia, then, the yuan is growing in significance for practical purposes, though it’s highly likely Russian citizens and firms would still give their right arm to get access to US dollars, rather than yuan.”

Other than trade, there is little sign that the yuan has gained ground in Russia as it remains difficult to exchange into roubles, according to residents and visitors.

Rick Wang, a senior manager of a down jacket manufacturer in Zhejiang province, who visited Russia in February, was disappointed that he could no longer use yuan in supermarkets.

“I don’t know why. Four, five years ago I was able to do so,” he said.

A Chinese national who lives in Moscow, who did not want to be named due to the sensitivity of the issue, said there is “no use” of the yuan in everyday life.

“If you have some cash in yuan, yes, some banks can exchange it. But it’s very limited,” they said.

“Maybe in some trade settlement, it could happen. But the US dollar still dominates.”

For all the talk and reeling off of examples, the yuan’s international role is destined to remain quite small in global trade and settlement, and especially in global capital movements George Magnus

While Russia has been growing the amount of yuan in its banking system in an attempt to substitute the US dollar, in addition to the lack of convertibility, it faces the constraint that trade with China is still quite limited compared with China’s trade with Asean nations, such as Vietnam and Malaysia, according to Magnus.

“Yet, for all the talk and reeling off of examples, the yuan’s international role is destined to remain quite small in global trade and settlement, and especially in global capital movements,” Magnus added.

“Even if it could double over time from, say, 3 to 6 per cent of Swift transactions, it would still be smaller than the British Pound.”