February 4, 2023

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The yuan is the new dollar as Russia rides to the redback By Reuters

©Reuters. Chinese yuan and US dollar banknotes are seen behind a backlit stock chart in this February 10, 2020 illustration. REUTERS/Dado Ruvic/Illustration

By Elena Fabrichnaya and Samuel Shen

MOSCOW/SHANGHAI (Reuters) – Chinese entrepreneur Wang Min has welcomed Russia’s adoption of the yuan. His LED lighting company can contract Russian customers in yuan instead of dollars or euros, and they can pay him in yuan. It’s “win-win,” he says.

Wang’s plans have been altered by the conflict in Ukraine and subsequent Western sanctions against Moscow, which have banned Russia’s banks and many of its companies from the dollar and euro payment systems.

Its contract manufacturing business with Russia has historically been small, but it’s now preparing to invest in warehousing there.

“We hope that sales in Russia can account for 10-15% of our total sales next year,” said the businessman from southern China’s coastal province of Guangdong, whose annual sales of about $20 million come mainly from Africa and South America.

Wang is looking to capitalize on a rapid “yuanization” of Russia’s economy this year as the isolated country seeks financial security from Asian powerhouse China. He sees a win-win situation in that Chinese exporters reduce their currency risks and payment becomes more convenient for Russian buyers.

While the yuan, or renminbi, has been gradually advancing into Russia for years, the creep has turned into a sprint over the past nine months as the currency has invaded the country’s markets and trade flows, according to a Reuters review of data and interviews with 10 business leaders – and financial actors.

Russia’s eastward financial shift could boost cross-border trade, provide a growing economic counterweight to the dollar, and limit Western efforts to use economic pressure on Moscow.

Total transactions in the yuan-ruble pair on the Moscow Stock Exchange rose to an average of nearly 9 billion yuan ($1.25 billion) a day last month, stock market data analyzed by Reuters showed. Previously, they rarely exceeded 1 billion yuan in a whole week.

“What happened was that it suddenly became very risky and expensive to hold traditional currencies – dollars, euros, British pounds,” said Andrei Akopian, chief executive of Moscow-based investment firm Caderus Capital, citing the potential danger of a bank , which holds foreign currencies sanctioned cash deposits.

“Everyone was motivated and even pushed for the ruble or other currencies, including and especially the renminbi.”

In fact, yuan-ruble trades totaled 185 billion yuan in October, more than 80 times the level in February, when Russia launched a so-called “special military operation” in Ukraine later in the month, according to stock market data.

The surge in interest has seen the yuan’s share of the foreign exchange market rise to 40-45% from less than 1% earlier in the year, said Dmitry Piskulov, head of international projects at the foreign exchange market department of the Moscow Stock Exchange.

In comparison, the share of the dollar/ruble pair, which dominated more than 80% of trading volume in the Russian market in January, fell to about 40% in October, according to stock market data and the central bank.

The US Treasury declined to comment on the yuan’s growing presence in Russia.

RUSSIAN GIANTS WANT YUAN

International money flows reflect a similar trend.

As of April, Russia didn’t even make the top 15 list of countries using the yuan outside of mainland China by value of inbound and outbound flows, according to data from global financial network system SWIFT.

It has since jumped to number 4, behind only Hong Kong, the city’s former colonial ruler, Great Britain, and Singapore.

However, to put this in a global context, the dollar and euro are still by far the dominant currencies, accounting for more than 42% and 35% of flows respectively in September of this year. The yuan has risen to almost 2.5% from under 2% two years ago.

Wang’s business optimism is shared by Shen Muhui, who runs a trade group for small exporters to Russia in neighboring Fujian province. He said more and more Russian buyers are opening yuan accounts and transacting directly in Chinese currency, which he says is a major benefit.

“The Russia-Ukraine conflict has brought opportunities for Chinese businessmen,” Shen said, adding that his association has received many inquiries from Chinese companies interested in doing business in Russia.

It’s not just Chinese companies or small businesses that are joining the Yuan bandwagon.

Seven Russian corporate giants, including Rusal, Rosneft and Polyus, have collectively borrowed 42 billion yuan in the Russian market, according to Reuters calculations, and the list could grow even further as No. 1 lenders Sberbank and oil major Gazpromneft say that they also consider renminbi debt.

Aluminum producer Rusal, which buys raw materials from China and then sells a large portion of its finished goods there, told Reuters it had increased the share of the yuan used for those purchases and sales this year and the share is continuing to rise will. although it refused to provide a detailed breakdown.

XI AND PUTIN: “NO BORDERS”

While President Vladimir Putin has long sought to reduce Russia’s dependence on the dollar, geopolitics have accelerated that trend in 2022.

China, the world’s second largest economy, is the largest global power not to join economic sanctions against Russia. In fact, Putin and Chinese President Xi Jinping sealed a “borderless” partnership in February, weeks before Moscow launched a “military special operation” in Ukraine.

The yuan accounted for about 19% of Russia’s trade transactions with China in 2021, versus the dollar’s 49% share, Andrey Melnikov, deputy director of the Department of International Cooperation at the Bank of Russia, said in September.

Though figures for 2022 have not yet been released, the Chinese currency is gaining ground, according to Melnikov, who told a conference that demand for yuan liquidity has surged due to restricted access to traditional payment methods and the freeze on its foreign and overseas gold be currency reserves.

The central bank declined to comment on the article.

The bank’s governor, Elvira Nabiullina, is tracking the growth and told lawmakers this month that the inflow of yuan illustrated a “change in the currency composition of our economy.”

Regulators are also aware of potential dangers such as B. A mismatch between a growing number of yuan-denominated checking accounts and currency deposits, with yuan-denominated credit only beginning to develop.

The central bank said lenders should seek to mitigate the growing risks of yuanization of their balance sheets — or gaps between yuan assets and liabilities — by increasing payments in yuan for imports, investing in yuan-denominated securities, or using yuan for trade transactions other countries use.

Regulators don’t plan to limit the yuan’s use now and could encourage banks to use more by easing provisions on the currency and tightening them on dollars and euros, said Elizaveta Danilova, director of the central bank’s financial stability department. at a conference this month.

“RENMINBI BACK”

Caderus Capital’s Akopian said some Russian brokerage firms reported that their clients were holding an increasing proportion of their wealth in yuan.

The inflows have led to a broad decline in interest rates on yuan deposits in Russia. They range from 0.01% to 2.45% for one-year yuan deposits in Russia, compared to 1.6% for one-year deposits in the mainland, according to Russian banking aggregators and major Chinese banks.

“You can already open a renminbi account with most Russian banks. Interest rates are very low because there is an abundance of renminbi in investors’ pockets,” Akopian added. “Therefore, every Renminbi product becomes very popular as soon as it is launched. There is a great demand.”

Some small Russian savers are also jumping in to hedge against ruble uncertainty.

Andrey, a communications specialist from Moscow who said he moved to Dubai in September to avoid being called up to fight in Ukraine, bought both yuan and dirhams online through his Russian bank for security reasons before leaving.

“I see it as a way to protect my money from an unpredictable fall in the ruble,” said the 35-year-old, who asked for his last name to be withheld because he had evaded mobilization.

“I can convert my rubles into these alternative currencies, but it’s more like buying a stock or a bond.”

($1 = 7.2074 yuan)