After the Moscow Stock Exchange stopped using the U.S. dollar and the euro for on-the-spot trading in response to the escalation of U.S. sanctions, the 'takeover' of the renminbi on the Russian foreign exchange market has been nearly completed. According to Extrema Ratio, the division of geostrategic tasks between Russia and China pre-existed the invasion of Ukraine, albeit in embryonic form
"Russian foreign exchange transactions are now almost 100 percent settled in yuan," Bloomberg reported on July 10, the latest report released by the Central Bank of Russia showed that the yuan's share of the Russian foreign exchange market has reached 99.6 percent.
The U.S. website Business Insider commented that this shows that "the 'takeover' of the Russian foreign exchange market by the yuan is nearly complete" after the Moscow Stock Exchange stopped trading on-market in dollars and euros due to U.S. sanctions.
On July 9, the Russian Central Bank released a financial market risk assessment report for June. The report said that after the United States imposed a new round of sanctions on Russia on June 12, the average daily trading volume of the Russian foreign exchange market fell by 32.7%, from 418 billion rubles in the first half of June to 282 billion rubles in the second half of the month. In June, the total transaction volume of the Russian foreign exchange market fell by 33.3% from May to 6.3 trillion rubles.
According to Extrema Ratio, the division of geostrategic tasks between Russia and China pre-existed the invasion of Ukraine, albeit in embryonic form.
At the same time, some of the trading volume of currencies such as the US dollar and the euro “flowed” into the yuan, the report said, with the latter's trading volume on the Moscow Stock Exchange “reaching record levels” in 2019. On June 19, RMB trading volume on the Russian currency market amounted to 509 billion rubles, higher than the highest figure of 446 billion rubles before the implementation of US sanctions.
The report reads: "After the introduction of the (American) restrictions, almost all foreign currency transactions began to be settled in RMB, accounting for 99.6% of the total transaction volume, according to data previously released by the Bank Russian Central". In May, RMB transactions accounted for 10% of the total, accounting for 53.6% of the Russian currency market.
Dynamics of Russian FX volume (red bar) and share of RMB in transactions (gray line) RBC report
However, transactions in the US dollar and the euro are still conducted over the counter. The report said that due to one less trading day in June than in May, the overall over-the-counter trading volume of the Russian foreign exchange market fell slightly from 13.1 trillion rubles to 13.0 trillion rubles. In June, the over-the-counter trading volume of "toxic" currencies such as the US dollar and the euro was 7 trillion rubles, basically the same as the monthly average figure since the beginning of this year (6.97 trillion rubles), but the share increased from 58.1% to 67.3%. In addition, the over-the-counter trading share of the RMB also rose slightly by 0.8 percentage points to 40%.
The US "Business Insider" website commented on July 10 that this shows that after the Moscow Stock Exchange stopped using the US dollar and the euro for on-site trading in response to the escalation of US sanctions, "the 'takeover' of the RMB over the Russian foreign exchange market has been almost completed."
On June 12, the US Treasury Department announced a new package of sanctions against Russia, targeting the institutions that make up the Russian financial system and the “transnational network” that supplies raw materials to Russian gold producers to support Russian weapons production. Among them, the Moscow Stock Exchange and its affiliate State Settlement Depository Company and the State Clearing Center are on the list of sanctions targets.
On the same day, the Moscow Stock Exchange issued a statement announcing that from the following day it would no longer use US dollars and euros for transactions.
Bloomberg reported on July 9 that evidence of the yuan's role in the Russian economy is everywhere today. For example, when Yandex NV, the Dutch parent company of Yandex, the "Russian version of Google," sold its assets in Russia, U.S. shareholders received yuan instead of dollars or euros because the latter two currencies could not be transferred from Russia, according to two people familiar with the matter who asked not to be named.
In addition, Russian companies have reportedly turned to the yuan in addition to the ruble to convert loans into dollars and euros and to issue new bonds, while the Russian Central Bank uses the yuan for National Provident Fund operations. Earlier this year, RMB deposits in Russian banks surpassed the U.S. dollar as the main foreign currency for savings, according to the report. By 2023, RMB deposits in Russia will double to $68.7 billion, several times the size of other major offshore RMB economies such as the United Kingdom and Singapore.
RMB Share of Russian Loans, Deposits, Bonds, Monthly FX Transactions, 2022 and 2023 Bloomberg
On the trade front, statistics released by China's General Administration of Customs on June 7 showed that the volume of trade between Russia and China in January-May 2024 increased by 2.9% year-on-year to $96,509.2 million. According to Bloomberg Economic Research's measurements, current Russia-China trade is almost exclusively settled in yuan. The report added that since Russia's yuan-denominated exports exceed its exports to China, this means that other countries are also settling their bills to Russia in yuan.
Russian exports in yuan (black) vs. exports to China (yellow) Bloomberg
According to the March Financial Risk Assessment Report of the Central Bank of the Russian Federation , turnover of the exchange-traded renminbi had reached 53 percent, while the share of over-the-counter transactions set a new record of 39.6 percent.
The document states that after the outbreak of the conflict between Russia and Ukraine and the sanctions imposed by the United States and its allies on Russia, Moscow sought to rapidly reduce the role of the US dollar and the euro in its economy and to shift trade from Europe to Asia.
The Russian Central Bank also revealed that in March the percentage of foreign exchange transactions of so-called "toxic currencies", including the US dollar and the euro, fell to 46.4% from 52.8% in February. In the sector of over-the-counter transactions, the share of "toxic currencies" fell to 54.7% from 59.8% in February.
On April 8, Elvira Nabiullina, governor of the Russian Central Bank, said in a speech to parliament that Russia is creating conditions for settlement in the currencies of several countries. Over the past year, the share of settlements in currencies other than the US dollar or euro has increased from 39% to 67%. She revealed that the currencies used for payments are now basically rubles and renminbi, and “the share of US dollars and euros has been almost halved.”
Nabiullina said in an interview on January 30 that the renminbi's share in Russian export deals has increased 85 times over the past two years. At the same time, she stressed that although global economic growth is slowing, "we have successfully avoided a 'hard landing'."
Last year, Russian professionals believed that Russia would continue to replace the US dollar and the euro, mainly using the renminbi, but the share of other friendly countries' currencies would steadily increase.
According to a report by the Russian Satellite News Agency on February 21, data from the Russian Foreign Trade Bank (VTB) showed that as of the end of 2023, the RMB accounted for 25% of Russians' foreign currency savings, becoming the second largest popular foreign currency savings in Russia.
According to reports, the rapid increase in the Russian people's RMB reserves is due to the rapid growth of Sino-Russian trade in recent years. In 2021, the volume of goods trade between China and Russia reached $146.87 billion, a year-on-year increase of 35.9%. In 2022, the trade volume between China and Russia will further increase, reaching 190.2 billion US dollars. In 2023, bilateral trade between China and Russia will exceed $200 billion for the first time, reaching $240.1 billion. The goal of reaching a trade volume of $200 billion was achieved one year ahead of schedule.
After the outbreak of the conflict between Russia and Ukraine, the share of the yuan in Russian currency transactions continued to increase. Images from Bloomberg Russian Central Bank data
Business Insider mentioned on July 10 that some experts had predicted that the renminbi would replace Western currencies in Russia, and warned that this could mark a slow but permanent shift in the dollar's global dominance.
Alexandra Prokopenko, a researcher at the Carnegie Russia Eurasia Center and a former adviser to the Russian Central Bank, wrote last month that although the new restrictions imposed by the United States will cause "great pain" to the Russian economy and will inevitably have an impact on renminbi transactions, it is too late to impose the sanctions two years after the conflict broke out. The Russian government and companies have built infrastructure to circumvent sanctions and developed new payment systems to limit demand for dollars and euros.
Prokopenko believes that both Russia and China have demonstrated their ability to adapt to changing sanctions. "The new sanctions are completely turning the renminbi into the main currency for Russian foreign exchange transactions and settlements." She wrote, "There is still a long way to go to truly threaten the dominance of the dollar, but the trend of differentiation in the global financial system is now irreversible."
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