Russia is also the world’s second largest gold producer, and miners are keen to sell excess gold in international markets. Moscow is currently sitting on 150,000 gold bars valued at about $140 billion, mostly stacked in Russian vaults out of reach of Western asset freezes. Its gold holdings, for example, have nearly tripled since 2014. Moscow has been looking for alternatives to the euro and dollar since its first invasion of Ukraine in 2014. For as long as sanctions remain in place, Russia will have to stay on the right side of Beijing. While the yuan helped Russia weather the effects of sanctions in the short term, it also opened a Pandora’s box of new vulnerabilities for Moscow. Last year saw Russia take the first major steps toward the yuanization of its economy, a necessity for Moscow that in turn is increasing Beijing’s clout in international finance. If Beijing determines that the threat of secondary sanctions is becoming substantial, it will soon abandon the swap lines with Russia. However, such agreements expose Chinese financial institutions to US secondary sanctions for helping Russia’s sanctions evasion efforts. In January, the Russian and Chinese central banks agreed to set up a new yuan currency swap instrument. In 2014, Russia made a three-year currency swap deal worth 150 billion yuan and renewed it for another three years in 2017. Moscow has used bilateral swap lines with the Chinese Central Bank to build up its yuan reserves. Russia is vulnerable to Beijing’s political will when it comes to currency swap lines-an agreement between two central banks to exchange currencies. In March 2022, the Russian Central Bank and National Wealth Fund were estimated to own 140 billion dollars’ worth of yuan-denominated assets, money that could be not be obtained by Moscow if Beijing decides to impose capital controls.Ĭurrency swap lines elimination risk. The liquidity risk of Chinese bonds is one of the main reasons why central banks around the world avoid purchasing them. The Russian Central Bank might not be able to sell Chinese bonds and convert the proceeds to rubles if Beijing decides to impose restrictions on yuan outflows. In other words, China could choose at any time-for political reasons or otherwise-to make Chinese imports really expensive and Russian exports to China much cheaper.Ĭhinese bond liquidation risk. As a result, it became much more expensive for Russia to buy Chinese goods. Specifically, shortly after the invasion began, the Chinese government relaxed yuan controls to allow the rapidly depreciating ruble to fall faster, thus avoiding subsidizing Chinese goods for Russians by giving them more yuan than their rubles were really worth. A tightly controlled yuan may inherently seem more stable than a floating dollar, but Chinese authorities have managed the ruble-yuan exchange rate to its advantage before. China is Russia’s top trade partner, and its tight control of the yuan-ruble exchange rate creates risks for Russia’s balance of trade. With each of these actions, Russia created new vulnerabilities and cemented itself as the little brother in the relationship.
Meanwhile, ruble-yuan trade increased eighty-fold from February to October 2022. At the end of last year, Russia’s Finance Ministry increased the permitted share of yuan reserves in the National Wealth Fund to 60 percent. Moscow has rapidly intensified its use of yuan in two main ways: increasing the yuan’s share in Russia’s reserves and switching to direct ruble-yuan trade instead of using the dollar as an intermediary.
Of the few eligible options, such as the Indian rupee and South African rand, China’s yuan was the only one actively seeking an international role and able to take it on. The new currency needed two characteristics: It had to be relatively stable and minted by a non-sanctioning country. In February 2022, heavily sanctioned and isolated, Russia had to find an alternative to dollar-denominated transactions. Yuan makes Russia dependent on Beijing’s goodwill, while gold is not as sanctions-proof as Moscow expected, and Russia has had a hard time scaling up its illicit gold trade.
Chinese yuan and gold became the stars of the show, but both introduced new vulnerabilities and inconveniences. Russia has since pursued alternatives to manage its trade and reserves. As a result of unprecedented Western sanctions, Moscow overnight became unable to transact in dollars and euros-the world’s dominant currencies. Just days before Russia’s brutal invasion of Ukraine began in 2022, we warned that Russia and China’s collaboration on dedollarization-the process of reducing an economy’s reliance on the US dollar for international trade and finance-would not sanction-proof Russia’s economy.
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