Mar 8, 2022 - World

Russia turns to the renminbi

Illustration of a wallet featuring a Russian flag with a renminbi note

Illustration: Sarah Grillo/Axios

Russian companies and banks are turning to China's currency, the yuan (also known as the renminbi), as the doors to the U.S. dollar-based global financial system slam shut due to sanctions.

Why it matters: The sanctions on Russia "incrementally help internationalize the renminbi," James Fok, author of the book "Financial Cold War: A View of Sino-US Relations from the Financial Markets," told Axios.

  • "But that doesn't mean the renminbi is going to suddenly start rivaling the dollar in any meaningful way. In order for it to do so, you have a lot of other pieces that have to fall into place," Fok said.

What's happening: Russian companies are rushing to Chinese banks to inquire about opening accounts, Reuters reports.

  • FESCO Transportation Group, a Russian logistics company, told customers last week that it would accept payment in yuan.
  • After Visa and Mastercard suspended their operations in Russia, some Russian banks are considering switching to UnionPay, China's state-owned card payments system.

Zoom out: China's leaders chafe at U.S. financial hegemony and have pursued policies aimed at internationalizing the yuan, such as successfully advocating for its inclusion in the International Monetary Fund's special drawing rights basket in 2016, an important international reserve.

Yes, but: China's push toward internationalization of the yuan over the past decade has been half-hearted at best, with less than 2% of global payments using yuan.

  • Beijing is reluctant to relinquish control over the currency, and it does not want to bear the potential ill effects of having a globally dominant currency.
  • The government's tight capital controls make it difficult to move assets out of China, which discourages international yuan transactions.

State of play: Despite Russian interest, Chinese banks are wary of the risk of U.S. secondary sanctions, meaning the U.S. government's ability to penalize non-U.S. companies that do business with sanctioned entities.

What to watch: The sanctions "will certainly mean that the Russians will end up holding more renminbi," Fok said.

  • But for other countries to be willing to conduct more transactions in yuan, the Chinese government would need to relax capital controls and improve rule of law — or a splintering of the global financial system would have to occur to make the yuan seem more appealing in comparison.
  • "A lot of the pieces on the chessboard have yet to be moved," Fok said. "More likely, it will play out over a period of decades."

Go deeper: Western sanctions tie Russia even tighter to China

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