Russia’s economy is now so isolated that it has few options other than the Chinese yuan for its reserves

Russia’s economy is now so isolated that it has few options other than the Chinese yuan for its reserves
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Vladimir Putin and Xi Jinping talking.
Russian President Vladimir Putin and Chinese leader Xi Jinping.

  • Russia’s central bank says it has few alternatives other than the Chinese yuan as a key reserve asset.
  • The West is tightening its sanctions on Russia.
  • Russia cites the yuan’s rising international role and liquidity as reasons for its choice.

Russia’s central bank is feeling the heat from tightening Western sanctions.

In a report released on Friday, the Central Bank of Russia said it sees limited options other than the Chinese yuan for its reserves — because other currencies from countries “not unfriendly” to Russia are even less stable and liquid than the yuan.

“The exchange rates of these currencies are highly volatile, the markets have low liquidity, and in a number of such countries there are restrictions on the movement of capital, which is an obstacle to their use,” the Russian central bank said in its report. The bank did not specify which other currencies or countries it was referring to.

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“These factors predetermine the key role of the Chinese yuan in the formation of reserve assets,” it said. The Russian central bank said the yuan’s role as an international currency and its liquidity has risen “noticeably” in recent years.

A state of increasing isolation

Russia’s increasing reliance on the yuan shows its economy is becoming increasingly isolated in the international trade and finance system. It also points to the yuan as a rising challenger to the US dollar as an international trade and reserve currency.

Countries around the world have been spooked by the West’s use of the dollar-based global financial system to punish Russia — which has in turn driven some countries to turn to alternative currencies, including the yuan, for diversification.

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Russia has managed to keep its economy resilient after two years of war in Ukraine, effectively steering trade from the West to the East and other alternative markets, particularly India and China.

Russian President Vladimir Putin has also been pushing for trade in local currencies to get around the West’s ban on some Russian banks’ use of SWIFT, the messaging service that lets banks worldwide communicate about cross-border transactions.

Russia used the Chinese yuan to pay for three-quarters of its trade with China and one-quarter of its transactions with third countries in the first half of 2023.

However, Moscow is increasingly hamstrung by tightening Western sanctions, particularly secondary sanctions against companies that still do business with Russia.

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Moscow’s reliance on the Chinese yuan comes with risks.

Russian companies that borrow in the Chinese yuan are facing increased lending costs, Bloomberg reported last month. The borrowing cost for short-term yuan bonds even briefly spiked to 15.7% on March 1 before falling to 4% days later, Bloomberg reported at the time.

Russia’s central bank reported holding $599 billion in international reserves in 2023 — including the $300 billion frozen by the West that the US and EU are eying for the reconstruction of Ukraine.

Read the original article on Business Insider

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