Impending Yuan Crisis: How U.S. Sanctions Could Upend Russian-Chinese Trade Relations

The approaching expiration of a crucial U.S. license related to financial transactions presents significant challenges for Russian businesses engaging in trade with China. This development could lead to heightened difficulties and costs for companies looking to transact in Chinese yuan, as sources involved in imports have recently indicated.

Since the onset of Western sanctions in response to Russia’s military actions in Ukraine in February 2022, the yuan has surged in popularity and has become the most widely traded foreign currency in Moscow. As relationships strain in the wake of these sanctions, fears are mounting among importers about potential disruptions in payments between Russia and China.

The U.S. Treasury’s Office of Foreign Assets Control (OFAC) issued sanctions in June targeting the Moscow Exchange and the National Clearing Centre (NCC). A temporarily granted license, which is set to expire on October 12, allows entities to wind down specific transactions that would otherwise be affected by these sanctions. The possibility of an extension for this license remains uncertain, and if it is not renewed, Russian companies could face a sudden and drastic reduction in yuan availability.

Industry insiders predict that following the license’s expiry, essential conversion operations will cease, significantly impacting transactions involving Chinese banks. Payment obstacles are expected to become even more acute, with a potential halt in payments from China to Russia. “The situation may change after Oct. 12,” suggested a concerned importer, warning of possible shortages in yuan and the likelihood of Chinese banks refusing to process additional payments for Russian clients.

As Chinese banks exhibit hesitance due to possible secondary sanctions involving Russian entities, the Bank of Russia’s ability to provide support through foreign exchange swaps has also come under scrutiny. Consequently, a substantial backlog of payments in yuan is being reported, as many Chinese state banks have already begun restricting dealings with Russian counterparts. Increasing logistics costs and higher fees for agents are compounding the challenges of international trade.

Moreover, systemic risks are rising as the central bank acknowledges payment difficulties, urging commercial banks to lessen their yuan loan portfolios. This request deepens the yuan liquidity crisis that many large Russian firms are now facing. With trading on the Moscow Exchange for the yuan potentially set to be canceled, analysts warn of a significant impact on the national currency’s exchange rate. “If yuan trading on the Moscow Exchange is really canceled, then there will be no exchange benchmark for the rouble,” stated Finam brokerage analyst Alexander Potavin.

This financial impasse highlights the reliance of Russian corporations on an effective and stable yuan-liquidation process. Without it, significant volatility and manipulation become stark realities in the interbank market, casting a shadow over future trade prospects and economic stability.

As the deadline approaches, the substance of these developments is essential for companies globally, especially those with interests in the Eurasian market. Understanding the nuances of international trade and currency dealings in this geopolitical context will be critical for navigating the challenges that lie ahead.