In a recent note, the Washington, DC-based think tank pointed to Russia’s reliance on the yuan since Western sanctions last year cut off Moscow from the dollar and euro in the global financial system.
According to the Carnegie Endowment, the dollar and euro accounted for 52% of transactions in Russia’s market before the invasion of Ukraine, but that plunged 34% within the first nine months of 2022. Meanwhile, trade with Russia’s ruble rose from 12.3% to 32.4% of transactions, and trade with China’s yuan skyrocketed from 0.4% to 14% transactions.
Meanwhile, the yuan isn’t a threat to dollar dominance, the Carnegie report said, because the yuan’s internationalization entails more dollar reserves while the greenback also stabilizes the yuan in offshore markets like Hong Kong.
“Accordingly, the yuan’s strength as a reserve currency doesn’t weaken the dollar; rather, the two currencies complement each other,” the note said. “This means that Beijing can’t really help Moscow in its crusade against the dollar.”
China can’t help Russia evade sanctions either. Though China hasn’t officially enforced Western sanctions, the nation has technically complied with them, the note added.
And while the deepening partnership between Russia and China is helping the Kremlin shoulder the weight of sanctions in the interim, it could harm the economy in the long run, especially if their political relationship starts to sour.
“Russian reserves and payments will be influenced by the policies of the Chinese Communist Party and the People’s Bank of China. Should relations between the two countries deteriorate, Russia may face reserve losses and payment disruptions,” the note warned. “Russian leaders like to emphasize the unprecedented strategic cooperation between the two countries. Yet in reality, this cooperation makes Moscow increasingly dependent on Beijing.”
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