Russia and China announced their intention to move away from the U.S. dollar as their primary trading currency standard in favour of the Chinese Yuan. The news follows Russian Vladimir Putin and Chinese President Xi Jinping’s declaration of friendship and partnership following the latter’s three-day trip to Moscow.
Historically, the Kremlin has been reluctant to intertwine its economy with China, fearing handing potential economic leverages to Beijing, further exacerbating its ailing economy. President Putin first considered the idea after the 2014 Russian annexation of Crimea prompted Western sanctions, shrinking Russian GDP growth almost overnight.
President Putin is understood to have fast-tracked the currency change following Russia’s invasion of Ukraine in 2022. The severity of new EU sanctions wrought havoc upon the Russian economy.
The U.S. treasury department sanctioned “2,400 entities and individuals” in addition to $300 billion in frozen reserves, causing Russian inflation to peak at an astonishing 14%.
Whilst the IMF predicts inflation will stabilise at 5%, the $60 EU oil price cap threatens to plunge the country, which has based its economy on a $70 barrel minimum price quota, into an economic death spiral. The proposed cap would cost the ‘Kremlin over $170 million each day’ alone.
Russia’s continuation of the war in Ukraine, estimated by Forbes at “approximately $82 billion” in the first year alone, necessitates leveraging its foreign currency reserves.
The United States international financial hegemony, the U.S. dollar accounting for 59.8% of all world foreign exchange reserves, has made this extremely difficult for Russia. Considering an additional 19.7% of reserves are in Euros, Putin’s hand has effectively been forced into Chinese pockets.
An overreliance on Yuan poses the same innate risks as reliance on the dollar, however, should Russia and China’s tenuous relationship deteriorate in the future. Unlike the U.S. dollar, the Chinese Yuan is controlled entirely by the state and can be manipulated or devalued, leaving them “hostage to Chinese interests,” claims Russian economist Stanislav Mitrakhovych.
Content for now to sacrifice long-term agency for short-term stability, Russia has already begun to use the Chinese Yuan to prop up their economy. Utilising their renewed partnership with China (and their vast reserves of Yuan), the Kremlin has been selling their reserves of Chinese Yuan to offset their 3.3 trillion ruble budget deficit. Bloomberg reports that the Yuan overtook the U.S. dollar as the most traded currency at the Moscow exchange for the first time, topping 40% of all trades in March 2023.
The announcement does, however, pose long-term benefits for both countries. Relying primarily on the currency of hostile power as the cornerstone of foreign trade heavily restricts the direction of foreign policy. Russia and China are, and have been, extremely susceptible to the whims of American foreign policy. Crucially, the American trade embargoes have frozen over $300 billion of Russian foreign reserves–a freeze that the influx of Yuan seeks to remediate.
Russia’s desire to depend on the Yuan is understandably viewed extremely favourably in Beijing as China is also dependent on the U.S. dollar.
As the nation sought to enter the foreign market, it relied on the U.S. dollar for trade. Today, estimates consider China to hold “3.46 trillion USD in reserves and foreign currency liquidity”; doubling the second and third largest national reserves combined.
As Russian stockpiles of Yuan are sold to battle mounting inflation, the Kremlin is sourcing additional Yuan to offset Russia’s debilitating dollar dependency.
Currently, most Chinese-headed oil must pass through the straits of Hormuz and the strait of Malacca. Ringed with hostile U.S. allies, the Warsaw institute estimates that the strait of Malacca hosts 70% of the PRC’s petroleum and LNG exports.
Bilateral trade between the two countries has exploded, reaching a record high of 1.28 trillion yuan, increasing 34.3% from the previous year. Increasing oil and natural gas exports from Russia across their preexisting land border negates these risks.
Russia is the 11th largest economy in the world, ranking 6th in GDP. Despite Chinese concerns that Russia’s rampant firesale of the Yuan could devalue international market prices, inextricably linking Russia to the currency would strengthen its international recognition as a currency standard.
As China seeks to increase its African and South American influence, international reliance on the Yuan could grant Beijing potentially domineering control over dependent national economies.
The Kremlin understands that the adoption of the Chinese yuan over the dollar is a starkly Beijing-favoured gambit. President Putin calculates that avoiding total economic collapse and an embarrassing military defeat outweighs the risks - the preservation of power is a worthy trade for Russia's economic sovereignty.
Edited by: Alanna Fullerton
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