Warning: This article is economics-heavy and thus will be confusing for most readers.
Note: All figures, unless specified are denominated in USD. This
basically means that when I say $1 million in Yuan, that's equivalent to
the value of $1 million US dollars converted to Yuan.
Note 2: I'm going to try to include footnotes -- whenever you see [1] or [3], go to the bottom of the page and find the corresponding number if you want some more information.
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On Friday, in a report authored by the Bank of Russia, the central bank urged other banks to basically minimize the amount of loans denominated (or using the currency of) in Yuan, the official currency of the People's Republic of China. The Russian Central Bank aims to only sell about $200 million yuan per day, compared to the (about) $7.3 billion that the bank was selling per day in the past month, a 97% decrease in the amount of yuan that the Central Bank is willing to sell per day. This is especially concerning considering that according to Bloomberg, the Yuan "accounted for 99.6% of the Russian foreign exchange market."
To illustrate the significance, imagine this scenario: You own a lemonade stand, and you make a lot of lemonade bucks. However, no real company organization wants your lemonade bucks -- meaning you can't (for example) buy another lemonade stand, buy the ingredients for lemonade, or buy paper cups. But you can buy these things in CARES Cash (CC). So to solve your problem of not being able to spend your currency, you go to one of your friends, who has some CARES Cash (CC), and basically every day, you give him 25 lemonade bucks for 5 CARES Cash (CC).
And your friend is friends with a really big number of people, and converts a bunch of other people's lemonade bucks into CC too. Let's say in total, he gives out 1000 CC per day and gets 5000 lemonade bucks.[1]
All of a sudden however, he tells everyone that he doesn't have a lot of CC, and that from now on, he can only give out 30 CC per day, a 97% decrease from how much he used to trade with everyone from before. Clearly, you (and everyone else) are super scared, as you need CARES Cash in order to buy lemons and sugar and paper cups, and without CC, you can't buy anything and keep your business going.[2]
Well, that's the situation that some russian companies find themselves in currently. In my analogy, you (the lemonade stand owner) would be a company, the lemonade bucks are the Russian Ruble, the CARES Cash is the Chinese Yuan, and the friend that you go to for CARES Cash is the Russian central bank.
So why did this all happen? Well, when Russia invaded Ukraine in 2022, the United States and almost all countries in Europe put sanctions on Russia and its allies who were involved in the war. Roughly speaking, sanctions are basically economic penalties applied to a nation. For example, American companies were not allowed to do business with Russia. Overall[3], this meant that the stored up foreign reserves of US dollars by the Russian Central Bank couldn't be spent and thus was (and still is) worthless. Ditto with the Euro. Furthermore, with the freezing (and seizing) of assets belonging to Russian oligarchs, Russia essentially lost a lot of its currency stored offshore.[4]
What this meant to Russia and Russian International Companies is that it was basically barred from using 3 of the 4 major foreign currencies (the Euro, the US dollar, the Japanese Yen[5]) to pay for things, leaving them with only 1 currency, the Chinese Yuan.
And since Russia and China are pretty close, Russia has been able to use the Yuan to stabilize its own currency and help its own companies pay for international goods and services.
However, with the recent new wave of June sanctions, Chinese businesses and corporations have been reluctant to help out the Russian government and businesses, for fear of being sanctioned by the United States and losing an important customer. Thus, there has not been steady Yuan cash flow between Chinese businesses and the Russian economy as a whole, leading to our current situation now -- where Russian banks have run out of Yuan to lend, and without money to lend, economic growth will slow within the Russian economy. Only time will tell what the implications of these cuts are, and how the Russian economy as a whole will react and be affected.
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| Xi Jinping and Vladimir Putin in Beijing for talks in May. Source: Getty Images |
Notes:
1. By this metric, you would be getting 0.5% of the CC exchanged per day, or if this was in the real-world, around $36 million (in Yuan) of the total $7.3 billion that's being traded out every day. That's a lot of money.
2. The trading lemonade bucks for CARES Cash in formal economics terms is called a Foreign Exchange Swap.
3. Ok this is more nuanced but basically the US also put sanctions on countries that were helping Russia, such as China. So even though Russia could give all their USD to China, Chinese companies wouldn't really be able to spend it. Now of course you could technically "launder" it through other Chinese companies, but the main problem is that since most of the money is digital (e.g. when you buy a bunch of stocks, you don't usually get pieces of paper saying you have a stake in some company), the US can simply refuse the money and the money is once again basically useless. I guess maybe BRICS could get some use out of it....
4. From this lecture (at around 40:30), it is interesting to note that the Soviet government before its collapse moved a lot of assets offshore. Most likely this is (was?) still happening.
5. Recently the Yen has had stability issues but since Japan is allied with the US and Western countries, Japan also applied sanctions on Russia.
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Sources:
Bloomberg - Russian Liquidity Problems, Bloomberg - Russian Yuan Shortage, Reuters, Business Insider, Fortune
3 comments:
Interesting, the fact that even China, a famous supporter of the Russian government is pulling out of deals with them in threat of economic sanctions. Originally, I though the UN was not being strict enough on foreign trade with Russia but with the threat of sanction on China too it's going to put a chokehold on their economy, certainly wonder if this will put an end to the war or not.
I mean it's Chinese businesses (individually) pulling out of their dealings with Russia as they're scared of getting hit by sanctions. Other than that, it can be argued that the UN was not strict enough because Russia still could "buy" items using proxies like China, but now, this is much harder. As I put in a footnote, the US's strategy of "containment" basically followed a similar plan as what the US and NATO are trying to do now -- which is basically let Russia/USSR do whatever it's doing, knowing that if you cut off resources and supplies to it by trade embargos, eventually the economy will collapse as it isn't sustainable. Like you mentioned, it'll be interesting to see if economic incentives deter Russia from continuing.
This is a great explanation of the liquidity problem. It’s interesting because a country’s currency’s value is largely determined by another country’s willingness to import from them, which is why Russia's central bank is holding onto “worthless” currency. Now some chinese firms are actually still willing to trade with Russia because they have the demand so why not but I was on a an airplane when traveling within China and the person sitting next to me was talking to her friend about how an acquaintance of hers was a billionaire (in rmb) who owned a firm doing trade deals with Russia, now the governments going after him so he’s just literally running all over the place to hide from the government. That probably explains why many Chinese firms are pulling out their dealings. China’s authoritarian way of controlling flow of capital and currency allows the country to restrict its trade with Russia, the “villain” in this war with all the sanctions from the west; and in some way this protects rmb’s credibility in the global market. Well rmb was already at its low, so it didn’t have to go lower, especially if China's economy is not that dependent on trade with Russia.
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