A year after Western sanctions against Russia in the aftermath of the Ukraine invasion, China’s yuan has taken over from the US dollar as the most traded currency in Russia.
The trend has been building for some time, but it was in February this year that the yuan surpassed the dollar in monthly trading volume for the first time. That gap has widened further in March, according to data from the Moscow Exchange.
The move is a consequence of additional sanctions imposed this year that have affected the few banks in Russia that can make cross-border transfers in dollars and other currencies of countries considered “unfriendly” by the Kremlin. As a result, Russia has strengthened its ties with China, and President Xi Jinping made Moscow his first port of call abroad after his reelection, promising expanded cooperation in trade, investment, supply chains, mega-projects, energy, and hi-tech.
Sanctions that have targeted Russia’s financial system have forced the Kremlin and Russian companies to switch foreign trade transactions from the dollar and euro to currencies of countries that have declined to join any restrictions. The Finance Ministry has converted its market operations to the yuan instead of the dollar earlier this year and developed a new structure for the national wealth fund to hold 60% of its assets in yuan. The Bank of Russia regularly calls on companies and citizens to move their assets into the ruble or “friendly” currencies to avoid the risk of having them blocked or frozen.
Despite this, the dollar has remained the most popular currency on the Russian market until now, only occasionally losing out to the yuan in terms of volumes on any given trading day. The trend appears to be down to fewer dollars on the market as Russia’s revenues have decreased due to the oil-price drop and a decrease in exports. At the same time, commodity imports from Russia to China are up by 29%, while exports from China are stagnating.
While the trend away from the dollar will have significant implications for the global economy, it may also have consequences for Russia itself. Economists warn that too much reliance on China could damage Russia’s long-term economic prospects, with the country potentially losing out on investment and technology transfer from the West. It remains to be seen how far Russia is willing to go in its pivot to the East, and whether it will seek to balance its relationships with China and the West.