Entrance – yuan, exit – two – Newspaper Kommersant No. 171 (7372) dated 09/16/2022

One of the unexpected beneficiaries of the hostilities in Ukraine was the Chinese yuan, at least in Russia. The currency of the People’s Republic of China is taking new heights in terms of trading volumes on the MICEX. The Central Bank is increasing the share of the yuan in reserves. Gazprom transfers half of China’s payment for Russian gas into yuan, and the ruble part of the contract with CNPC will increase yuan liquidity in Russia, since the Chinese will buy rubles in Moscow for yuan. Now it is already difficult to find large banks that would not offer yuan products to their customers.

Until recently, things were different. The rise of the yuan in the Russian Federation could have occurred even after the first sanctions against the Russian Federation imposed by the US and the EU in 2014. Moreover, in 2016, the IMF added the yuan to its currency basket, formally recognizing it as one of the world’s reserve currencies. But Russian business soon became convinced that the Chinese regulators did not want to remove restrictions on the movement of capital, that is, the yuan by no means became freely convertible. Complicated approvals are required to withdraw proceeds from the PRC or convert them into more convenient currencies.

That is why business, until recently, considered the yuan as an expensive and not the most convenient instrument. The oil companies nominated part of the contracts with Chinese clients in local currency, and the proceeds were spent in China on the purchase of equipment. The ruble and yuan were also actively used in border trade. But for large transactions, the parties preferred dollars or euros. The Central Bank transferred almost 15% of its reserves to yuan in 2016, but the ruble-yuan swap agreed at the same time with the People’s Bank of China remained almost unclaimed.

Officials tried to help. In 2019, Moscow and Beijing signed an intergovernmental agreement to stimulate trade in national currencies. According to Chinese officials, Beijing proposed to create a mechanism similar to the exchange clearing system: large contracts are accounted for on an electronic platform, and settlements are made quarterly. But the PRC authorities refused to cut a separate window in the capital flow control regime, fearing that local businessmen would use it to withdraw capital. The scheme implied that the Yuan proceeds from oil and gas could only be spent in China. “She looks like a cartoon about Vovka in the distant kingdom, where they would have become sweets for us,” one of the Russian negotiators explained the reasons why Moscow rejected the idea.

But the situation has changed dramatically. As a result of Western sanctions against the Russian Federation, imports from the EU are rapidly declining, while imports from China to the Russian Federation are gradually growing. Given the mood in the EU, where business is actively getting rid of ties with the Russian Federation, and officials are increasingly critical of China, Beijing can quickly become a major export-import partner of Moscow.