Yes they have to some great degree. Russia is not in danger of collapsing or being unable to trade but the difficulties are mounting as the Chinese continue to be averse to directly standing up to US sanctions.
This article is quite good and goes into a bit of the details but I’m not sure how I feel about the conclusion that all is alright and this is doomed not to succeed and that this is a sign of decline which the author hastily inserts at the end without any real supporting evidence compared to the rest of the article. It feels not exactly supported, like putting a rosy spin on bad news.
The resilience of the Russian economy in the face of harsh Western sanctions sent those cheering the rise of multipolarity into victory laps. And it has been a huge embarrassment to the West. But Russia’s burgeoning problem settling payments with China demonstrates that this resilience isn’t without setbacks.
This past June, the US Treasury put the local banks of countries that trade with Russia in the crosshairs for secondary sanctions. The legal foundation for measures against companies or individuals found trading with sanctioned entities was originally implemented back in December, but it was in June that Washington expanded this framework and sent strong signals that this time it was serious. These threats were felt particularly acutely in China, Russia’s largest trade partner.
What happened and when It started with the big state-owned Chinese banks, which began shying away from dealing with Russia at the beginning of the year. But there were always smaller, regional banks, which were seen as less exposed to the Western financial system, which would take their place. For a while, it seemed these banks would carry the day. But now even these institutions have followed suit.
By the summer, Chinese banks were rejecting and returning about 80% of Russian payments made in Chinese yuan, Kommersant reported in late July. An article in Izvestia from mid-August claimed that things were even worse: 98% of Chinese banks were refusing to take direct yuan payments from Russia.
The result has been delayed and disrupted payments for many Russian importers. A Reuters report from last week discusses how transactions with Russia are being shut down “en masse” and billions of yuan worth of payments are being held up, according to a government source.
“At that moment, all cross-border payments to China stopped. We found solutions, but it took about three weeks, which is a very long time, trade volumes fell drastically during that time,” the government source told Reuters.
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Meanwhile, the tighter restrictions have led to a drying up of yuan liquidity in the Russian market. In other words, it has become harder and more expensive for Russian companies needing yuan to get ahold of the currency. Given how much of Russia’s trade now takes place in the Chinese currency, this is certainly an issue.
As a result of the squeeze, more and more firms are having to turn on a regular basis to a channel previously used as a last resort – expensive swaps with the Russian central bank (whereby entities post rubles as collateral in exchange for yuan). At the start of September, Russian banks raised a record 35 billion yuan through this facility, well up from the 20 billion daily average in August and 10 billion average in June. Essentially, the Bank of Russia is being forced to fill the gap left by Chinese private banks operating in Russia.
The Russian central bank will almost certainly have to play a larger role, and exporters will probably also step in to provide liquidity. But there is no quick and easy fix.
In making sense of these issues, first of all, it is important to note that this problem is well understood in Russia and is freely discussed, including at the highest levels of government and in the media. No façade is being erected; there is no attempt to suppress this story. It’s been on the front pages of the Russian financial press.
It also bears keeping in mind that Russia-China trade is not exactly collapsing. In fact, despite the problems, turnover actually grew overall by 1.6% in the first half of this year. More importantly, the experience of the last few years has shown that whatever headwinds emerge end up being a strong driver of change.
Central banks are proposed as a solution including CBDCs (central bank backed digital currencies) but the question then is would the US sanction central banks of partner countries like China and India?
In China’s case without knowing more or being an expert in these financial systems I’m tempted to say yes because they have it out for China anyways and really want to create friction between China and Russia by forcing China to choose either the US or Russia and if they choose Russia they use that as evidence and ammo to ramp up decoupling and sanctions on China and if they choose the US then it weakens Russia to encourage a US push to finish them off before taking on China or at least they hope pushes Russia away from helping China when the US takes them on.
As a result of the squeeze, more and more firms are having to turn on a regular basis to a channel previously used as a last resort – expensive swaps with the Russian central bank (whereby entities post rubles as collateral in exchange for yuan). At the start of September, Russian banks raised a record 35 billion yuan through this facility, well up from the 20 billion daily average in August and 10 billion average in June. Essentially, the Bank of Russia is being forced to fill the gap left by Chinese private banks operating in Russia.
With roughly 900 billion yuan swapped in August and June (so about $127 billion), and the initial estimate of the Russian central bank’s yuan holdings at $140 billion worth of yuan at the start of the war being about a fourth of all international Yuan holdings, it seems as if the cross border Yuan trade has grown dramatically. Well beyond anything I imagined.