The Yuan Ascendancy: How China is Reshaping Russia's Economic Landscape
As China and Russia have grown closer, economic and financial activity between the two have strengthened - but asymmetrically.
*This is a special report co-authored by Chief Executive Officer of IMR Strategy Matthew OBrien, and Pantheon Insights founder Dimitri Zabelin.
Russia’s war in Ukraine has been a geopolitical boon for China, with the Yuanization of the Slavic economy giving Beijing immense leverage over Moscow. As history has repeatedly shown, dominance of one currency in a regional and global economic paradigm gives the creditor standardization power through the sovereignty of its currency.
Or to put it another way: speak softly, but carry a big coin.
Currencies
Understanding the nature of currency is crucial for grasping the dynamics of global trade and economic stability. Our daily interactions with money, from paychecks to purchases, underscore its foundational role in modern society.
As Carl Menger elucidated in his 1871 work "Principles of Economics," currency is essentially an agreed-upon intermediary that satisfies the double coincidence of wants.
It facilitates the valuation and exchange of goods, services, labor, or time, enabling societal growth and specialization. Without a functional currency, a society's ability to trade, develop, or engage with other nations collapses.
The Russian Ruble in Ruins?
This brings us to the current predicament facing Russia. The invasion of Ukraine has inflicted severe costs on Russia—human losses, international isolation, economic destabilization—and now, it threatens the very core of its economic identity: its currency.
The Russian Ruble, once a staple of its economy, is being eclipsed by the Chinese Yuan. The Ruble's diminishing acceptance on the global stage is starkly illustrated by the shift in the currency used for Russian exports.
This year, payments for Russian exports in Yuan are projected to surpass $13 billion USD, a staggering increase from less than $1 billion USD from before the war. Notably, this shift is not driven by a significant increase in exports to China.
In 2022, Russian exports to China were valued at over $7 billion USD, with most transactions conducted in Rubles. The dramatic rise in the use of Yuan for purchasing Russian goods has only occurred post-conflict.
If China were merely compelling Russia to accept Yuan, we would expect a surplus of Yuan in Russian currency markets. However, the reality is quite the opposite. The Yuan is in short supply in Russia, with demand spikes exceeding 20% compared to the Ruble.
In the realm of cross-border transactions, the payment systems for Russian rubles and Chinese yuan have supplanted the SWIFT global bank messaging network and other traditional financial infrastructures. This shift underscores the evolving economic ties between Moscow and Beijing, as bilateral trade has soared to $240 billion annually, based on Chinese customs data.
Chinese exports to Russia in 2023 surpassed $111 billion, marking a 67 percent increase from 2021. Chinese goods now represent 38 percent of Russia’s imports, while 31 percent of Russian exports are destined for China alone. The surge in Chinese car exports to Russia is particularly notable, with a 594 percent increase, and the exports of trucks and tractors have skyrocketed by almost 700 percent.
As is evident, this relationship remains asymmetrical, with Russia’s dependency on China far outweighing the reverse. The Cross-Border Interbank Payment System (CIPS) has even been adopted by third countries for transactions with Russia.
For instance, in April 2023, Bangladesh used yuan to settle payments with a Russian nuclear power developer. Such operations, once rare before the conflict, are becoming increasingly common. In this context, Western sanctions on Russia have inadvertently bolstered the international standing of the yuan, significantly benefiting Beijing.
This scarcity indicates a profound shift in the Russian economy's reliance on the Yuan.
The Yuan's prominence extends beyond trade. According to the Bank of Russia, it has surged in the Russian bond market, lending markets, and deposits in Russian financial institutions, with volumes and numbers doubling this year alone.
For the average Russian, this shift portends grim consequences. The Ruble's declining reliability threatens the stability of any savings held in financial markets. Domestic currency instability translates to erratic pricing for basic goods, fueling inflation for essential items.
The soaring cost of potatoes in Russia, a dietary staple, highlights the potential for widespread malnutrition as the Ruble falters.
Russia's role as a key player in markets such as steel, nickel, wheat, and seed oils remains critical. However, trade disruptions stemming from currency instability could lead to internal manipulation and power struggles, further damaging Russia's industrial and commercial sectors.
While it may be tempting to view Russia's economic decline as a geopolitical advantage, it is essential to recognize the broader implications. Russia's multi-ethnic composition and the presence of groups like ISIS-K in the south raise concerns about regional stability.
The management of nuclear weapons becomes precarious in a failed state, and desperation can drive people to extreme measures. Policymakers should monitor these developments, and ensure that every unit of weakness does not lead to a disproportionate rise in future risks that outweigh current political challenges.