After Russia’s invasion of Ukraine and subsequent sanctions by the West, international trade settlements are moving towards RMB (Chinese Yuan) conversion. However, using RMB for trade with Russia is becoming increasingly challenging, indicating the difficulty of RMB competing with the US dollar, making it almost impossible to replace the dollar.
The United States began sanctioning overseas banks supporting Russia in December last year. Major Chinese commercial banks like Industrial and Commercial Bank of China have refused to accept RMB payments from Russia. Some local Chinese banks including Ping An Bank, Ningbo Bank, and Guangfa Bank have completely stopped accepting payments from Russia.
Since Washington expanded the definition of Russia’s military-industrial base and implemented secondary sanctions in June, more Chinese banks are reluctant to engage in payments and trade settlements with Russia.
According to Russian media “Izvestia,” as of August 12th, 98% of Chinese banks (even small local banks) refuse to accept direct China payments transfers from Russia.
Reports from various trade forums in mainland China suggest that smaller banks friendly with Russia, such as Hunchun Rural Commercial Bank, have announced the suspension of cross-border remittance services effective from July 23, 2024.
A source informed Reuters that Russian banks are not the top priority for Chinese banks. Although trade between China and Russia has been flourishing, China’s trade volume with the US and the EU remains significantly higher. “They will not sacrifice their market to pay Russian companies,” the source stated.
Major Russian commodity exporters informed Bloomberg that since the US expanded sanctions in June, more direct payments in RMB have been frozen or delayed, turning trade with China into a gamble.
Chinese buyers of Russian agricultural products faced payment issues in July, while the Russian Automobile Dealers Association warned that imports of cars and car parts from China could halt due to settlement problems.
In many cases, transactions between Russia and China can only be conducted through agents from former Soviet republics. In the past three weeks, there has been a multiple increase in the flow of applications for existing payment agents through third countries, as reported by “Izvestia.”
“Cross-border payment issues in 2024 have become a critical challenge for Russian businesses,” said Alexander Potavin, an analyst at Finam in Moscow, speaking to Bloomberg. He mentioned that payment delays are severe, averaging now 10 to 16 days.
Potavin also highlighted that Russian banks are now encouraging the use of cryptocurrencies to bypass Western sanctions and facilitate foreign currency inflows.
Settlements using cryptocurrencies via Hong Kong are becoming increasingly popular, although intermediary entities in countries such as Uzbekistan or Kazakhstan need to be involved.
Reuters previously reported that half of the payments Russia makes to China are routed through intermediary entities (including Hong Kong, Kyrgyzstan, Kazakhstan, the UAE, and other friendly countries). Each transaction through intermediaries could incur thousands of dollars in commissions, and there’s a risk of goods being seized if involving third countries.
China and Russia have been striving to de-dollarize their bilateral trade to reduce reliance on global dollar settlements. Russia’s invasion of Ukraine and subsequent Western sanctions accelerated this process.
As of December 2023, about one-third of Russia’s foreign trade was settled in RMB, with Russian banks holding $68.7 billion in RMB.
The latest round of US sanctions in June halted forex transactions in US dollars and euros for Russia, making RMB the only liquid currency available for trading and purchase in Russian brokerage accounts, accounting for 99.6% of total transactions.
Russia is moving towards RMB internationalization, but the RMB is struggling to be a reliable alternative to the dollar. Due to current Chinese capital control measures, RMB cannot become an official reserve currency. Non-reserve currencies are difficult to use in trade with other countries, leading to increased transaction costs.
In March, Bloomberg reported that the lack of RMB liquidity in Russia and importers’ demand for RMB led to higher borrowing costs.
Bloomberg economist Alexander Isakov stated that the shortage of RMB in the Russian financial system indicates emerging issues with the increasing volume of RMB loans in domestic banks despite the war erupting two years ago.
The second round of US sanctions in June halted RMB flow into Russia, forcing local banks to borrow currencies from the Central Bank of Russia at higher rates.
As reported by Bloomberg, with RMB liquidity drying up in Russia, more Russian companies are turning to conducting RMB swap transactions with the Central Bank of Russia, which was previously seen as a costly last resort. In August, the daily average amount borrowed through swap transactions soared to 20 billion RMB from 10 billion RMB in June.
Taras Skvortsov, Senior Vice President of the Bank of Russia, believes that despite the significant improvement in RMB liquidity, the situation has “no prospects” in the eyes of the Bank of Russia.
Economist Isakov believed that higher RMB costs might lead to a decrease in trade volume with China. If China’s exports to Russia (both direct and re-export) decline in the second half of this year, the US could achieve a significant victory in its sanctions against Russia. The feasibility of RMB as an alternative to the dollar would be further questioned.
Data from China Customs Administration showed that in March 2024, China’s exports to Russia declined for the first time since 2022, dropping by 16% year-on-year. This downward trend continued in April with a 13.5% decline.
However, there was a recovery in May, but in June, overall imports from Russia to China calculated in RMB decreased by 6.7%, more than the 2.2% decline observed in May.
According to sources informed by Reuters, Russia-China trade is ongoing, but costs have increased significantly, resulting in higher expenses.
Natalya Zubarevich, a Russian regional expert at Moscow State University, stated that payment difficulties between countries are worsening, especially on the import side. She expressed concerns about Russia’s domestic market deteriorating while indicating that the import situation for components will gradually worsen.
Wang Guochen, an assistant researcher at the Chinese Academy of Economic Studies, stated that the exchange of RMB or Ruble between China and Russia is a predetermined course and should not decrease due to the US’s sanction stimuli. “I believe that bilateral RMB transactions will accelerate from the end of this year to the next year.
“According to SWIFT statistics, international payments on both sides have increased. However, according to the IMF’s foreign exchange reserve ratio, the proportion of RMB has decreased. In other words, Putin does not trust the RMB and only uses it as an intermediary, looking for ways to sell it and convert it into dollars or euros.”
Xie Tian, a professor at the Moore School of Business at the University of South Carolina, noted that the active sanctions by the US against Russia have indeed increased the trading costs for Russian importers and exporters primarily using RMB. However, he believes that there won’t be a significant decline in China’s exports to Russia in the second half of this year.
“Because China has a commitment of unlimited cooperation with Russia; furthermore, China’s exports to Europe and the US are currently declining. Disconnecting exports to Russia would also have a significant impact on its own economy.”