Since the invasion of Ukraine, tensions between Russian and Western powers have been steadily building. In an attempt to evade financial restrictions from the West, Russia has turned to its new alternative currency: the Chinese yuan.
Russia has historically depended on the U.S. dollar and other Western currencies like the Euro. However, since the annexation of Crimea in 2014, Russia’s dependency on foreign currency has been leveraged against them by countries disapproving of their actions. Western nations have frozen around $300 billion of Russia’s foreign reserves and limited its ability to make global payments in response to the invasion of Ukraine. The United States has also implemented different economic sanctions, limiting Russia’s free use of the dollar.
In response, Russia has increased its use of the Chinese yuan to decrease its financial dependence on the West. Russia has doubled the share of yuan its sovereign-wealth fund can hold to 60% and the share of Russian exports paid for in yuan has risen from 0.4% at the start of the Ukraine war to 14% in December. Since the start of the war, trade between Russia and China has increased drastically. China has become a major buyer of Russian oil, which has been boycotted by the West, and Russia has become dependent on various tech exports from China. This increase in trade has also made the transition to the yuan much more appealing for Russian businesses.
The yuan has even reached the household level in Russian society. This is significant because Russians have long relied on euros and dollars to protect themselves from the volatility of the Russian ruble. At the start of last year, Russian households held approximately nothing in yuan. At the end of last year, that number is up to $6 billion. That makes the yuan over 10% of the foreign currency held by Russian households. Almost 50 financial institutions in Russia now offer yuan savings accounts and the first denominated exchange-traded fund launched on the Moscow Exchange in January.
China has been working towards making the yuan a more dominant global currency as many have speculated about its potential to uproot the U.S. dollar-based financial system. In 2015, they launched a cross-border payment system to potentially compete with the current SWIFT network, which relies on the dollar. This investment into infrastructure highlights China’s desire to make the yuan the dominant global currency and better integrating it into such a large nation like Russia. Certainly looks like a step in the right direction for China.
However, there is still a long way to go for China to uproot the dollar as the global economy has been built on dollar-based trading infrastructure for decades. This move by Russia might not mean the end of the dollar’s reign, however, it might prompt countries to use more fractured systems when it comes to foreign currencies, to negate the ability of financial warfare through currency restrictions.
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