Russian Banks Struggle to Obtain Yuan Amid Tighter Sanctions

Moscow, August 13 – Stricter U.S. sanctions have limited the flow of Chinese yuan into Russia, forcing Russian banks to borrow the currency from their central bank at higher rates. This development was reported by Bloomberg, as noted by FFN.

Following Russia’s 2022 invasion of Ukraine and the subsequent sanctions that cut Russia off from Western markets, China has become Russia’s primary trading partner. Under the “unlimited friendship” between Moscow and Beijing, imports and exports worth approximately $240 billion (€219.68 billion) are now almost entirely transacted in yuan.

However, there is growing evidence that Chinese banks are increasingly wary of facing penalties for indirectly financing Russia’s war efforts following the expansion of U.S. sanctions in June. Payment issues were a top agenda item when Russian President Vladimir Putin met with Chinese President Xi Jinping.

Due to the “drying up” of yuan liquidity in Russia, Russian companies are increasingly resorting to yuan swaps with the Russian central bank, a move previously considered an expensive “last resort.” The average daily volume of yuan borrowed through swaps jumped to 20 billion yuan (€2.55 billion) in August, compared to 10 billion CNY in June, according to Bloomberg’s calculations based on the latest data from the Russian central bank.

Russian companies are also increasingly making payments through allied former Soviet republics, such as Kazakhstan. Additionally, exporters can now retain more of their earnings outside of Russia following the relaxation of mandatory repatriation rules.

“The Russian money market for yuan has not recovered, indicating that Russian banks are struggling to find reliable solutions. The central bank is stepping into a gap likely left by the branches of Chinese private banks in Russia. Higher costs for yuan could result in a lower trade volume with China, which is Russia’s main source of imports. If Chinese exports to Russia decline in the second half of the year, Washington may claim a significant victory in its campaign against Russia. Another point of contention will be limiting the yuan’s ability to serve as an alternative to the dollar,” said Russian economist Alex Isakov.

Last month, U.S. National Security Advisor Jake Sullivan stated that the U.S. is preparing new sanctions against Chinese entities supporting Russia’s war in Ukraine, suggesting that Chinese banks could be targeted.

This warning has led many Chinese lenders to exercise caution in transferring yuan, with some freezing transactions altogether.

(1 EUR = 1.0925 USD; 1 EUR = 7.8439 CNY)

Tables: Key Indicators of Yuan Liquidity in Russia

Yuan Liquidity and Swap Volumes

Impact of Sanctions