Can Russia’s Plan to Increase Payments in Chinese Yuan Replace the Dollar and Euro?

The Complexities of Russia’s Plan to Increase Payments in Chinese Yuan

Russian President Vladimir Putin has announced a bold and potentially game-changing move: to increase external payments in Chinese yuan. Putin believes that by doing so, Russia can develop trade relationships with countries in Asia, Africa, and Latin America. The plan, however, is not without its challenges and skeptics.
Currently, most external trade contracts in Russia are conducted in dollars, euros, or local currencies through loans. While some local currencies such as the Turkish lira, the United Arab Emirates’ dirham, and the Indian rupee are used for payments with countries such as Turkey, the UAE, China, and India, they are not entirely reliable for replacing reserve currencies such as the dollar and the euro. Enter the yuan.

Experts like Ivan Uglyanitsa, a financial market analyst, believe that the yuan can help to circumvent or partially mitigate the impact of Western sanctions, much like other local currencies. However, Uglyanitsa also acknowledges that these tools are not entirely reliable for replacing reserve currencies such as the dollar and the euro, as they are not freely convertible and are subject to restrictions from their respective countries. It is a complex issue that Putin is trying to navigate.

Skepticism regarding Russia’s ability to switch most of its external trade to yuan also exists. Vitaly Shapran, a former member of the National Bank of Ukraine Council, argues that China’s nominal economic scale is not as significant as that of the US and EU. Furthermore, interbank payment systems in yuan are not yet ready to use the currency as the primary reserve. Shapran notes that a significant volume of yuan that the Central Bank of Russia deposited in China is not easy to withdraw, and a specific commodity flow is necessary. The Chinese market is not yet ready for a free inflow and outflow of capital in the hundreds of billions of yuan.

In conclusion, Putin’s plan to switch to yuan payments could potentially help Russia circumvent Western sanctions. However, the complexities and uncertainties surrounding the plan cannot be ignored. The yuan, like other local currencies, is not entirely reliable in replacing reserve currencies such as the dollar and the euro. Moreover, the interbank payment systems in yuan are not yet ready to use the currency as the primary reserve. It will take a significant effort from Russia and China to navigate this complex issue successfully.