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After the U.S. and its allies sanctioned Russia in 2022 for its invasion of Ukraine, Moscow turned away from the dollar and euro in international transactions and relied more on China\u2019s yuan.<\/p>\n
That coincided with more trade between the two countries as Russia was largely shut out of Western markets as well as the global financial system. <\/p>\n
By June, the yuan accounted for 99.6% of the Russian foreign exchange market, according to Bloomberg<\/a>, which cited data from Russia\u2019s central bank. And Russian commercial banks ramped up corporate loans denominated in yuan.<\/p>\n But this dependence on the yuan is now backfiring as top Russian banks are running out of the Chinese currency, Reuters reported<\/a> on Thursday. <\/p>\n \u201cWe cannot lend in yuan because we have nothing to cover our foreign currency positions with,\u201d German Gref, CEO of top Russian lender Sberbank<\/a>, said at an economic forum.<\/p>\n That\u2019s because the U.S. expanded its definition of Russia\u2019s military industry earlier this year, thereby widening the potential scope of Chinese firms that could get hit with secondary sanctions for doing business with Moscow.<\/p>\n As a result, Chinese banks have been reluctant to transfer yuan to Russian counterparts while servicing\u00a0foreign trade payments, leaving transactions in limbo for months. With yuan liquidity drying up from China, Russian companies have tapped the central bank for yuan via currency swaps.<\/p>\n At the start of this month, banks raised a record 35 billion yuan from Russian\u2019s central bank through these swaps, according to Reuters. And banks were expecting more help.<\/p>\n \u201cI think the central bank can do something,\u201d Andrei Kostin, CEO of second-largest bank VTB, said Thursday. \u201cThey hopefully understand the need to increase the liquidity offer through swaps.\u201d <\/p>\n But on Friday, Russia\u2019s central bank dashed those hopes, calling on banks to curb corporate loans denominated in yuan.<\/p>\n The Bank of Russia also said in a report that swaps are only meant for short-term stabilization of the domestic currency market and are not a long-term source of funding, according to Bloomberg<\/a>.\u00a0But rather than simply filling the roles that dollars and euros did, yuan loans have expanded. <\/p>\n \u201cThe increase in yuan lending was partly caused by the replacement of loans in \u2018toxic\u2019 currencies, but 41% of the increase was down to new currency loans,\u201d the bank said.<\/p>\n The central bank also released a survey that showed a quarter of Russian exporters had trouble with foreign counterparts, including blocked or returned payments even when dealing in supposedly friendly countries. And about half of exporters said the problems got worse in the second quarter from the prior quarter.<\/p>\n The overall Russian economy has been propped up by the government\u2019s wartime spending as well as oil exports to China and India. But the combination of busy factories and labor shortages due to military mobilizations have stoked more inflation.<\/p>\n Researchers led by Yale\u2019s Jeffrey Sonnenfeld\u00a0warned the seemingly robust GDP data mask deeper problems in the economy<\/a>.<\/p>\n \u201cSimply put, Putin\u2019s administration has prioritized military production over all else in the economy, at substantial cost,\u201d they wrote. \u201cWhile the defense industry expands, Russian consumers are increasingly burdened with debt, potentially setting the stage for a looming crisis. The excessive focus on military spending is crowding out productive investments in other sectors of the economy, stifling long-term growth prospects and innovation.\u201d<\/p>\n<\/div>\nRecommended reading:<\/strong>
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