Russians rushed to open deposits in the new currency: what are the risks?

— Is the increase in Russians’ trust in the yuan justified?

— To understand this, let’s pay attention to the latest news regarding financial relations between Russia and China. Let me remind you that on February 7, information appeared that the main Chinese bank for Russian importers, Zhejiang Chouzhou Commercial, had stopped all settlements with the Russian Federation due to the threat of secondary sanctions. For the same reason, compliance was tightened (this term refers to a list of requirements to prevent violations of laws and regulations of official documents, regulations of regulatory authorities and the internal code of ethics of the organization – “MK”) in relation to Russian clients, the largest banks in China are Bank of China, China Construction Bank and Industrial and Commercial Bank of China. Since the beginning of February, two Chinese payment systems PingPong and Xtransfer, through which payments were made to Hong Kong banks, have stopped accepting any payments from Russian banks. On February 8, Russian President Vladimir Putin had a telephone conversation with Chinese President Xi Jinping. Assistant to the President of the Russian Federation Yuri Ushakov said that in the conversation the leaders noted: “for the further progressive development of trade and investment ties, it is important to continue working together to build a financial infrastructure that ensures reliable payments.”

— Over the past two years, the Celestial Empire has become our main trading partner, and here we have such an unpleasant “surprise” from our neighbors…

— Indeed, China’s share in Russian exports in 2023 reached 30.6%, and in imports – 36.5%. However, China’s main trading partner is the United States. In 2023, China’s exports to the United States amounted to $427.2 billion, while to Russia – almost 4 times less – $111 billion. Therefore, China is forced to limit financial transactions with Russia and avoid obvious violation of anti-Russian sanctions.

In an interview with Tucker Carlson on February 9, Vladimir Putin said that with his “friend, Chairman Xi Jinping,” he set a joint goal that this year we “were supposed to reach $200 billion in trade turnover with China.” Both Russia and China have exceeded this level. According to the head of state, Russian trade turnover with the Celestial Empire is “already $230 billion, according to Chinese statistics – $240 billion.” The President emphasized a very important thing: we have a balanced trade turnover, and it “complements each other in the high-tech sector, in the energy sector, and in the field of scientific development.”

– Since everything is so good, where are the financial problems?

— Indeed, financially, Russian-Chinese trade is quite well balanced: in 2023, imports from China amounted to about $111 billion, exports to China – $129.1 billion. What cannot be said, for example, about the critically unbalanced Russian-Indian trade: in April -November 2023, Russia exported goods worth $40.5 billion to India, but imported goods worth only $2.7 billion from India.

However, in economic terms, Russian-Chinese trade is still very, very far from being balanced. Its main problem is that China, taking advantage of its dominant position in the Russian market, sells its goods in Russia at inflated prices, and buys Russian goods at reduced prices.

Thus, according to Bloomberg, in 2024 the average price of Russian gas supplies to China is expected to be $271.6 per thousand cubic meters compared to the price for Europe of $481.7 per thousand cubic meters.

“But there are sanctions in Europe, and China probably has long-term contracts with Russia, the prices for which are set in advance, at the time of signing the contracts, and do not change depending on market conditions. Are there any examples from outside the energy sector?

— Yes, let’s say a Haval Dargo car in its cheapest version costs 1.5 million rubles in China, and in Russia, and domestically assembled, it costs 3 million rubles. The reason for such a big difference, of course, is not the “greed” of the Chinese, but also taxes, excise taxes and duties, as well as transport costs.

In addition, China sells mainly high-value-added goods to Russia, primarily cars and smartphones, while Russia sells mainly low-value-added goods to China, primarily mineral fuels, ores and metals.

It turns out that China is developing high-tech production through exports to Russia, and Russia is investing in infrastructure designed to supply raw materials to China. Moreover, in the event of another reversal, China will redirect its commodity flows to other countries, but what do you order to do with the infrastructure intended for the supply of raw materials to China? Agree, such an exchange is far from equal.

— In other words, Russia risks turning from a “raw materials appendage of Europe” into a “raw materials appendage of China”? But isn’t it the government’s task to prevent such a scenario?

— The main task for the government now is to minimize the impact of sanctions. All other reasons faded into the background. Due to anti-Russian sanctions, non-cash payments in dollars and euros became either inaccessible or extremely risky for Russian enterprises, so they had to switch from “toxic” to “friendly” currencies.

– And what’s the problem?

— The fact is that neither the yuan nor the Indian rupee are freely convertible currencies; these currencies are partially convertible, and they can be used primarily for settlements with the issuing countries of these currencies. Therefore, an attempt to use the yuan as a reserve currency is a necessary measure “not from a good life.” Meanwhile, the National Welfare Fund (NWF) placed all its foreign currency funds in a single currency – the yuan. As of January 1, 2024, the assets of the National Welfare Fund contained 227.5 billion yuan worth $31.9 billion. Of course, such “diversification” carries great risks, as was demonstrated by the incident with the suspension of settlements between Chinese banks and Russia. Let’s hope this problem will be fixed soon.

— Well, for Russians, is the transition to yuan deposits good or bad?

– It’s unavoidable. The process of “detoxification”—dedollarization and de-euroization—is accompanied by the process of yuanization. In particular, yuan are replacing dollars and euros in the foreign exchange deposit market. If on April 1, 2022, the share of non-toxic currencies in the amount of foreign currency deposits of individuals was only 0.4%, then on January 1, 2024 it increased more than 50 times and reached 22.9%. The amount of deposits in non-toxic currencies (mainly in yuan) reached $9.6 billion as of January 1, 2024. Moreover, Russians were especially active in opening deposits in yuan in December: their amount increased by $2.3 billion or immediately by 32.1%, while for the whole of 2023 – by 49.3%. Russians are starting to get used to the yuan.

– And they’re doing it right?

“The problem is that a “non-toxic” currency can easily become “toxic.” In any case, we must not forget about diversification. If faith in the dollar and euro is undermined, then “eternal values” remain – gold, platinum and other precious metals. In 2023, Russians “got rich”: they bought about 95 tons of gold bullion. This seems like a solid figure, but in reality it comes out to only 0.65 grams per capita.