Russia Turns to China’s Yuan in Effort to Ditch the Dollar – WSJ


Russia Turns to China’s Yuan in Effort to Ditch the Dollar

Moscow has jettisoned longstanding concerns about giving China too much leverage over its economy

By Chelsey Dulaney, Evan Gershkovich and Victoria Simanovskaya

Feb. 28, 2023 5:30 am ET

Russia’s economy, restricted from Western financial networks and the U.S. dollar, has embraced a burgeoning alternative: the Chinese yuan.

Energy exporters are increasingly getting paid in yuan. Russia’s sovereign-wealth fund, a war chest to support government spending burdened by battlefield costs in Ukraine, is using the Chinese currency to store its oil riches. Russian companies have borrowed in yuan, also known as renminbi, and households are stashing savings in it.

The Chinese currency’s rise inside Russia deepens ties between two countries that have long rivaled each other for global influence but have grown closer amid shared discontent with the West. It also serves China’s long standing but mostly frustrated campaign to make the yuan a more prominent feature of global finance and commerce. 

Moscow has jettisoned concerns about giving China too much leverage over its economy, said Alexander Gabuev, a senior fellow at the Carnegie Endowment for International Peace.

“Now it’s the only rational choice for Russia and for Putin,” Mr. Gabuev said. “If depending on renminbi is the lifeline that helps you to be less exposed and less dependent on hostile currencies, then you take this route.”

A spokesperson for the Russian Ministry of Finance said the yuan is “taking an increasingly important role” in its sovereign-wealth fund, which doubled the share of yuan it can hold to 60% in December. The ministry started selling yuan in January to plug its widening budget deficit.

Russia began cutting its dependence on the dollar in 2014 after its annexation of Crimea. By 2018, as the U.S. imposed additional economic sanctions, the country began to sell its holdings of U.S. Treasury bonds and explore trade in rubles and other currencies.

De-dollarization went into overdrive, and widened to include the euro, last year. Western countries froze some $300 billion of Russia’s foreign reserves and banned some of its banks from the SWIFT messaging system that underpins most global payments in response to Russia’s invasion of Ukraine. 

Russians don’t face an outright ban on using dollars or euros, and non-sanctioned banks continue to do business in foreign currencies. 

Booming trade between Russia and China added to the yuan’s appeal. China has become a major buyer of Russian oil that is shunned by the West, while Russia has grown more dependent on China for semiconductors and other technology. 

While still in its early days, some see Russia’s yuan use as a test case in a debate that has long captivated the financial world: Will the yuan eventually rival the dollar as the world’s dominant currency? 

But building the infrastructure to circumvent the dollar-based financial system built up over decades is slow, difficult and expensive, said Eswar Prasad, a professor at Cornell University and former head of the International Monetary Fund’s China division. 

China launched a cross-border payments system known as CIPS in 2015 that has been billed as an eventual competitor to the 50-year-old SWIFT network. But its system hasn’t yet been widely adopted by other countries, according to Mr. Prasad. Instead, Russian and Chinese banks rely on networks of local branches and correspondent banks to process transactions without SWIFT. The Russian central bank this month set up an international settlements department it said would focus on expanding settlements in national currencies.

While Russia’s use of the yuan doesn’t mean the end of dollar supremacy, it may usher in the beginning of a more fractured system that could ultimately blunt the U.S.’s ability to use financial sanctions as a weapon, said Daniel McDowell, a professor at Syracuse University who recently wrote a book on the topic.

“The more countries you force to find those alternatives,” Mr. McDowell said, “effectively what you’re going to do is increase economies of scale and experience in those areas.”

—Rebecca Feng contributed to this article.

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