Jakarta, CNBC Indonesia – New sanctions against Russia have helped strengthen the role of the Chinese yuan as a replacement for the dollar, the Western currency, according to the Carnegie Russia Eurasia Center think tank.
According to their report, the Chinese yuan will take over Russia's main trading currency position 'once and for all'. This is amid increasingly tight US sanctions.
“There is still a long way to go before there is a real threat to the dollar's dominance, but the trend toward fragmentation of the global financial system is irreversible now,” wrote Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center, as quoted by Reuters. Business Insider, Monday (24/6/2024).
The comments came as a new set of US sanctions were announced earlier this month, aimed at putting broad pressure on Moscow’s remaining financial lifelines. Among the targets were the Moscow Exchange, and other major entities that facilitate currency transactions.
Overall, this is likely to worsen the ruble’s volatility, and make its use in foreign trade more complicated. In return, Prokopenko said, a more stable currency would benefit.
“The new sanctions will turn the yuan into the main currency of trade and foreign exchange settlement in Russia forever,” he predicted.
“In May, the yuan's share in foreign exchange trading once again hit a new record, reaching 53.6%. Its share in the over-the-counter market was 39.2%,” he said.
“While the new US restrictions threaten secondary sanctions on foreign institutions facilitating financial ties with Russia, this is unlikely to wipe out yuan trading,” Prokopenko added.
Of course, as China moves away from sanctioned entities, their place will likely be filled by institutions created exclusively to operate with Russia. Otherwise, new exchange intermediaries may emerge.
“Both Moscow and Beijing have shown that they are able to adapt to evolving sanctions. When leading Chinese banks stopped dealing with Russian clients due to the threat of secondary sanctions, regional banks stepped up to replace them,” he said.
“Schemes with multiple intermediaries from places like Kazakhstan and the UAE are also starting to be used more actively, and companies are starting to use cryptocurrencies in payments,” he added.
While the sanctions package will certainly create financial hardship for the Kremlin, Prokopenko argues that it should have been implemented years earlier to be most effective. Since 2022, Russia has had time to build infrastructure to evade sanctions, and a new payment system has been developed that limits the need for dollars and euros.
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