Russia’s economy: Greater dependence on the Chinese yuan is a failure

This was accompanied by a rise in trade between the 2 countries, as Russia was largely excluded from Western markets and the worldwide economic system.

By June, the yuan accounted for 99.6% of the Russian foreign exchange market. in keeping with Bloombergwhich cited data from the Russian Central Bank. And Russian industrial banks increased the variety of their corporate loans in yuan.

But this dependence on the yuan is now failing as the biggest Russian banks are running out of the Chinese currency. Reuters reported on Thursday.

“We cannot lend in yuan because we have nothing to cover our foreign currency positions with,” said German Gref, CEO of the key Russian bank Sberbank, at an economic forum.

This is since the US expanded its definition of the Russian arms industry earlier this yr, thereby expanding the range of Chinese firms that might be subject to secondary sanctions due to their business relations with Moscow.

As a result, Chinese banks have been reluctant to transfer yuan to Russian partners while processing foreign trade payments, leaving transactions in limbo for months. As yuan liquidity from China dried up, Russian firms have tapped the central bank for yuan via currency swaps.

Earlier this month, banks received a record 35 billion yuan from the Russian central bank through these swaps, in keeping with Reuters. And the banks were expecting more help.

“I think the central bank can do something,” Andrei Kostin, CEO of the second-largest bank VTB, said on Thursday. “Hopefully they understand the need to increase the supply of liquidity through swaps.”

But on Friday, the Russian central bank dashed those hopes by asking banks to limit corporate lending in yuan.

The Bank of Russia also stated in a report that swaps are intended just for short-term stabilization of the domestic foreign exchange market and don’t represent a long-term source of financing. in keeping with BloombergBut as a substitute of simply taking on the role of the dollar and the euro, yuan loans have expanded.

“The increase in yuan loans was partly due to the replacement of loans in ‘toxic’ currencies, but 41 percent of the increase was due to new foreign currency loans,” the bank said.

The central bank also released a survey that found that 1 / 4 of Russian exporters had problems with foreign partners, including blocked or rejected payments even when doing business with supposedly friendly countries. And about half of exporters said that problems had worsened within the second quarter in comparison with the previous quarter.

The Russian economy as a complete has been supported by government war spending and oil exports to China and India, but the mix of busy factories and labor shortages attributable to military mobilization has further fueled inflation.

Researchers led by Jeffrey Sonnenfeld of Yale warned that the seemingly robust GDP data mask deeper problems within the economy.

“Putingly put, Putin’s government has prioritized defense production over everything else in the economy, at significant cost,” they wrote. “As the defense industry expands, Russian consumers are becoming increasingly indebted, potentially setting the stage for a looming crisis. The excessive focus on military spending crowds out productive investment in other sectors of the economy, thereby hampering long-term growth prospects and innovation.”