Yuan replaces U.S. dollar as most traded fiat in Russia

The Chinese yuan has taken over the U.S. dollar as the most traded fiat in Russia, a year after Moscow began its invasion of Ukraine, which led to a series of Western economic sanctions.

In February, the yuan surpassed the greenback in monthly trading volume for the first time. Data from the Moscow Exchange compiled by Bloomberg then showed that the difference between the yuan and dollar trading volumes was more pronounced in March. Before the Ukraine War, the yuan’s trading volume on Russia’s forex market was “negligible.”

“Now there are fewer dollars on the market as Russia’s revenues decreased due to the oil-price drop and a decrease in exports.”

Iskander Lutsko, Strategist at ITI London

ITI London strategist Iskander Lutsko explained that there were fewer dollars circulating on the Russian market due to the country’s decreased revenue in oil and lower export volumes to certain countries. At the same time, Russia’s commodity exports to China went up by 29 percent.

The recent development occurred after the West imposed additional sanctions on Russia this year, affecting a few banks in the country that initially could conduct cross-border transactions in dollars and other currencies that the Kremlin branded as “unfriendly.”

The Russian branch of Austria’s Raiffeisen Bank International was one of the lenders affected by higher pressure from U.S. and European authorities.

Western sanctions have forced Russia to forego the dollar and euro in foreign-trade transactions and instead use currencies of countries that have declined to participate in the West’s action.

Earlier this year, the Finance Ministry of Russia shifted its market operations to the yuan instead of the U.S. dollar. The ministry also created a new structure for the national wealth fund, transforming the reserve to hold 60 percent of its assets in yuan.

The Russian central bank also regularly encourages business entities and citizens to move their assets into rubles or other “friendly” currencies to protect them from getting their assets frozen. Nevertheless, the U.S. dollar remains one of the most popular currencies in Russia due to the ease of using it in international trade.

Analysts noted that Russia had strengthened its diplomatic relationship with China since February last year. Last month, Chinese leader Xi Jinping visited Russia — the president’s first official visit after his reelection — and announced plans to expand Chinese-Russian cooperation in sectors such as energy, hi-tech, trade, investment, supply chains and mega projects.

However, analysts also pointed out that despite the yuan’s increasing popularity in Russia, the currency still struggled to expand its share in the global economy due to geopolitical factors. Beijing also imposes strict capital controls over the yuan to counter the turmoil in the global financial markets.

By the end of 2022, the global forex reserves allocation in the yuan accounted for 2.7 percent of the total amount, down from the 2.9 percent peak achieved in the first quarter of last year.

China looking to improve yuan trade advantages

China is improving its yuan trade advantages by forming agreements with major commerce partners. Recently, China signed a deal with Brazil to exclusively use both countries’ national currencies for their bilateral trade instead of the greenback. Brazil is China’s tenth-largest trading partner and an important supplier of iron ore and soybeans.

The talk about the new agreement began in January, with China and Brazil’s central banks finalizing the terms of the agreement in February. They appointed a yuan clearing bank and access to China’s cross-border payment system to process future bilateral transactions last week.

The yuan’s influence in Brazil has increased over the years. By the end of 2022, the yuan share in Brazil’s forex assets hit a new high of 5.37 percent, surpassing the euro as the second-largest currency in the country’s forex market.

China has also formed similar trade agreements with a few other countries, including Iran.