- The latest batch of US sanctions against Russia will promote further use of the yuan, a think tank said.
- It argued that as ruble volatility increases, the Chinese currency will offer stability.
- While sanctions also threaten Chinese entities, they won’t be enough to disrupt yuan trading, it said.
Fresh sanctions on Russia are too late to be a game-changer, but they will help cement the role of China’s yuan in place of Western currencies, a think tank said.
“There is still a long way to go before there is a real threat to the dominance of the dollar, but the trend toward the fragmentation of the global financial system cannot be reversed now,” Alexandra Prokopenko, a Carnegie Russia Eurasia Center fellow, wrote.
The commentary comes as a new batch of US sanctions was announced earlier this month, meant to apply wide-sweeping pressure on Moscow’s remaining financial lifelines. Among targets were the Moscow Exchange, and other major entities that facilitate currency transactions.
In turn, Moex restricted the exchange of dollars and euros, effectively halting the chief source of access that Russians had for Western currencies.
That’s not to say that access to these tenders is completely off-limits; it will instead skew towards costly interbank and over-the-counter markets. And given the additional complexity of sanctions on these dealers, that could create various exchange rates for the ruble.
The official rate will now be set by Russia’s central bank.
All told, this is likely to worsen ruble volatility, and make its use in foreign trade more complicated. In its place, a more stable currency will benefit, Prokopenko said:
“The new sanctions are turning the yuan into the main currency of exchange trading and settlements in Russia once and for all,” she predicted. “In May, its share in exchange trading once again hit a new record, reaching 53.6 percent. Its share in the over-the-counter market was 39.2 percent.”
Although the new US restrictions threaten secondary sanctions on foreign institutions that facilitate financial ties with Russia, this likely won’t eradicate the yuan’s trade, Prokopenko added.
Of course, while Chinese step away from sanctioned entities, their place will likely be filled by institutions formed exclusively to operate with Russia. Otherwise, a new exchange intermediary might crop up in place.
“Both Moscow and Beijing have shown that they are capable of adapting to evolving sanctions. When leading Chinese banks stopped dealing with Russian clients over the threat of secondary sanctions, regional banks stepped up to take their place,” she said. “Schemes with numerous intermediaries from places such as Kazakhstan and the UAE also began to be used more actively, and companies began to use cryptocurrencies in payments.
While the sanctions package will definitely create financial pains for the Kremlin, Prokopenko argued that their application should have occurred years prior to be most effective.
Since 2022, Russia has had time to create an infrastructure for sanctions evasion, and new payments systems have been developed that limit the need for dollars and euros.
