The Russian authorities' idea of using the yuan as a surrogate reserve currency instead of the dollar and euro is collapsing under the pressure of American sanctions. The Central Bank, which had confidently claimed at the beginning of the summer that sanctions against the Moscow Exchange would not affect the actual state of affairs on the currency market, is now forced to acknowledge that the Russian currency market is segmented, and this segmentation is influencing macroeconomic conditions.
The restrictions imposed this summer on the Moscow Exchange have made the yuan traded there toxic for most foreign banks, including Chinese ones. In Russia, an 'internal' yuan has emerged, which can be used, for example, to hedge currency risks (since it is recognised by the Central Bank) but is almost useless for foreign trade operations. Demand for the 'internal' yuan has dropped in trading, and its exchange rate against the dollar and euro differs from international rates.
The interbank market, meanwhile, is experiencing a severe yuan liquidity crisis. Overnight loan rates in yuan first became double-digit and then triple-digit. The deficit is structural, and market participants warn that it is unlikely to be resolved anytime soon. In general, there is enough yuan in the financial system, but liquidity is concentrated among large players, and those market participants who do not receive currency from exporters will face shortages.
Thus, the Russian financial market has reached a state of ultimate abnormality. Solutions such as making payments to China through intermediaries or using cryptocurrencies are only temporary crutches, unable to replace market institutions and procedures, and are increasing costs and creating imbalances that could lead to new problems in the future.
Cut off from the dollar and euro, the world’s main reserve currencies, Russian authorities aimed to build a system of foreign trade reliant on the yuan. Although the yuan is neither a freely convertible nor a reserve currency, it plays a significant role in global finance. From 2022 to 2024, the share of the yuan in Russia’s foreign trade and currency market grew. By the beginning of this year, its share in payments for Russian exports had exceeded 40%, and in imports, it had nearly reached this level. On the exchange market, the yuan's share had already surpassed 50% (whereas before the war, it did not exceed 1%), and in the over-the-counter (OTC) market, it reached a third. Thus, the yuan was rapidly becoming a surrogate reserve currency for Russia.
However, the secondary sanctions mechanisms that the US began refining in 2023–2024 put an end to these plans. Faced with the choice between remaining in the global financial system or being confined to the yuan-ruble zone, most foreign banks chose the former. As a result, after the imposition of US sanctions on the Moscow Exchange, the Russian currency market entered a state of ultimate abnormality.
Immediately after the sanctions were introduced in June, the Central Bank insisted that the cessation of exchange trading in dollars and euros would not have a significant impact, because 'both the international currency market and the domestic currency markets of most countries are over-the-counter'. To support this claim, Central Bank representatives pointed out that the official exchange rate, calculated based on exchange trading, was almost identical to the OTC rate. Nevertheless, within the first few weeks after the sanctions were imposed, it became clear that the currency market would change. (→ Re:Russia: Toxic Convertibility). Its key features became opacity, volatility, and, most importantly, the actual splitting of the ruble’s exchange rates, not only against the dollar and euro but also against the yuan.
Comparing Russia's OTC currency market with the global market was misleading from the start. Although global market transactions are concluded without exchanges, the lion's share of settlements ultimately goes through a single platform – American CLS Bank, notes financier Sergey Romanchuk. In Russia, market participants trade directly with each other, meaning a unified market essentially does not exist. In the first weeks after the sanctions were imposed, counterparties could rely on OTC market statistics, which the Central Bank published daily. However, since mid-July, this data has not been released. Thus, the Central Bank itself took another step toward the complete absence of an OTC market. The opacity has resulted in a significant gap between buying and selling rates, as noted by analysts at the Bank of Finland Institute for Economies in Transition (BOFIT). Initially, the rates differed by 10%, but by the end of the summer, the gap had narrowed to about 5%. The Central Bank now acknowledges the fundamental segmentation of the Russian currency market as a factor influencing macroeconomic dynamics.
However, the most severe consequence of the June sanctions has been the collapse of the yuan market in Russia. After the transitional period allowed by the June sanctions ended in August, Russia saw the emergence of a 'domestic' yuan, which was effectively excluded from global trade.
In August, the exchange rate of the yuan, which, unlike the dollar and euro, continued to trade on the Moscow Exchange, unexpectedly diverged from the global rate by almost 10%. While the ruble weakened against the dollar and euro by 6% and 9%, respectively (due to a worsening balance of payments in July and the reduction of the mandatory foreign currency revenue sale threshold), the ruble-yuan rate on the Moscow Exchange remained almost unchanged. This anomaly is explained by the low demand for the yuan that can be bought on the Moscow Exchange, according to analysts from Alfa Investments. At the end of July, Vedomosti reported, citing Russian importers, that Chinese banks began gradually refusing to accept such yuan. After 13 August, the end of the transitional period set by the U.S. Treasury, the yuan left on the exchange became 'trapped within its circuit, becoming 'dirty' funds held by a counterparty under U.S. sanctions,' explains Sergey Romanchuk. 'Dirty' yuan from the Moscow Exchange can be used, for example, for hedging currency risks in Russia (since the Central Bank doesn’t consider these yuan 'dirty'), but they are not very useful as a payment method – to use them, one needs to find a counterparty unafraid of sanctions. Meanwhile, Chinese banks have recently been rejecting up to 80% of payments involving Russia, even when the senders are not under sanctions and operate with 'clean' yuan. (→ Re: Russia: Heated Stagflation).
The Central Bank acknowledges the problems with the yuan. 'The exchange rate [of the yuan] remains volatile amid the fragmentation of the currency market and geopolitical factors,' wrote its analysts in the latest issue of 'What The Trends Say'. The peak of the rate divergence in August predictably coincided with the tax period, when exporters increased their currency sales through the exchange. At the end of the month, as the tax period ended, the difference narrowed to a minimum, and at the beginning of September, the yuan on the Moscow Exchange even became slightly more expensive than abroad. However, Alfa Investments analysts suggest that during the next tax period, the rate on the Moscow Exchange may once again diverge from the global rate.
In addition to the end of the tax period, another, less significant, reason for the ruble's weakening against the yuan and other currencies was the publication of the Finance Ministry’s data on oil and gas revenues and their forecast for September, according to Alfa Investments. In September, the forecast indicates the plan will be exceeded by 162 billion rubles. According to the fiscal rule, the Central Bank must sell rubles received from the Finance Ministry and buy foreign currency and gold for the National Welfare Fund. On average, the Central Bank will spend 8.2 billion rubles per day on these operations. At the same time, it will sell foreign currency – 8.4 billion rubles per day (partly as part of the National Welfare Fund's investments, and partly to cover the budget deficit outside the fiscal rule in 2023). As a result, net currency sales will amount to only 200 million rubles per day, compared to 7.3 billion rubles per day in August.
Meanwhile, the demand for yuan in the interbank market is so high that participants unanimously describe an ‘acute liquidity crisis’. On September 4, the rate for one-day repo (a transaction involving the sale of securities with an obligation to repurchase them at a set price and date) RUSFAR CNY, which reflects the cost of borrowing yuan in the interbank market, reached a record high of 212% per annum, although it was 59.93% the previous day. By September 6, the rate had dropped to 72%, but even this is still high: at the start of the summer, before the sanctions against the Moscow Exchange, it did not exceed 2%.
The yuan liquidity shortage is structural, explains Sberbank’s chief economist Mikhail Matovnikov. In his view, there is enough yuan in the financial system (statistics on banks' yuan assets are closed, so experts can only speculate), but the funds are 'concentrated in certain banks' that are unwilling to share. Experts had warned back in June that major players would try to monopolize both sellers (exporters) and buyers (importers) of currency. 'The situation is exacerbated by the accumulation of yuan liquidity by large market participants,' notes PSB’s chief analyst Denis Popov. As an example, he points to the recent placement of 10-year bonds by Rosneft, totaling 15 billion yuan.
The problem of yuan shortages is being discussed at the Eastern Economic Forum, currently taking place in Vladivostok. Leaders of Sberbank and VTB reported that they are urging the Central Bank to 'get involved in this market'. To ease the liquidity crunch, the Central Bank introduced a special tool back in January – swap deals (involving a temporary exchange of assets or obligations) to sell yuan for rubles with a buyback after one day. Initially, the daily limit for such transactions was set at 10 billion yuan, increased to 20 billion in the spring, and then to 30 billion at the end of August. However, this volume appears insufficient to provide all market participants with access to yuan liquidity on acceptable terms.
As a result, the Russian financial system is practically broken and cannot be fully restored. The solutions that participants are resorting to – such as making payments to China through intermediaries or using cryptocurrencies — only temporarily patch the recurring gaps, while increasing transaction costs.