George Lei, Bloomberg Markets Live reporter & analyst
Xi Jinping, the Chinese President, ended his Russian visit Wednesday without making much progress in Ukraine. China has however pushed for stronger trade and investment connections with its northern neighbor, using its own currency.
This suggests that the path of least resistance to yuan internationalization runs through Moscow, rather than London or Singapore.
According to Tuesday's joint statement, Russia and China have pledged to increase their trade volumes by'significantly' by 2030. They also promised to continue to raise the percentage of local currency settlement. Although it might seem like a cheap political statement, a closer examination of the developments since the war with Ukraine shows that the Chinese currency has already made significant inroads in all areas of Russian financial life.
According to the Bank of Russia, the yuan's share in Russian export payments jumped 32-fold from 2022 to 16% in year-end.
Its use in Russian imports has also increased to 23%, from 4%.
As of January, 11% of Russia’s total FX deposits were held by Yuan savings. This compares to almost zero before the war.
The most traded FX on Moscow Exchange is now held by the Chinese currency, which has also overtaken euro and the dollar.
The yuan, which is not fully convertible, has never been used so extensively for trade and private savings.
Until one day, geopolitics is overthrown by market logic.
Alexander Gabuev is a senior fellow at Carnegie Endowment for International Peace.
The West's sanctions against Russia that severely restricted its access to the euro and dollar was a push factor. However, China's booming trade served as a pull.
Russia surpassed Saudi Arabia to become China’s largest oil supplier in February. Meanwhile, Beijing's total energy purchase grew to $88b in the past 12 month period. This is more than half the increase from February 2022.
China has also seen its businesses expand in its northern neighbor to fill the void left behind by Western brands.
According to SWIFT, Russia is the fifth largest user of the Chinese currency. It uses 2.3% of all global yuan payments. This puts it behind the US, Hong Kong, Singapore, and the UK. The country was not even in the top 15 last year. Its share of worldwide yuan payments was 0.3%. Russia will soon be the largest yuan user other than Hong Kong, at this rate.
The Russian central bank raised the reserve requirements for 'unfriendly' currencies to make it more expensive for commercial lenders to have liabilities in dollars and euros this week.
Moscow's financial system becomes more entangled the longer sanctions and war drag on.
If the current trend continues, Russia could become the first major economy in which the Chinese currency is equal to its American and European counterparts.