The Yuan Dominates Russia
The Russian Central Bank resorted to extreme measures on 28 November to prevent the rouble from falling further past 110 roubles per US dollar, following a record low the previous day when the exchange rate surpassed 113 roubles per dollar. The decline in the Russian currency came after the US Department of the Treasury introduced sanctions late last week against several Russian financial institutions, including Gazprombank. Gazprombank serves as a hub for handling foreign currency revenues from importers of Russian gas and oil. Additionally, the United States announced penalties for any non-Russian financial institutions collaborating with the Russian Financial Message Transfer System (SPFS), which Moscow created in response to the expanded restrictions on SWIFT, the global financial messaging system that facilitates interbank transactions worldwide.
Over the past 12 months, the rouble has fluctuated between 83.5 and 94.5 roubles per US dollar. However, the periods of strengthening in June and August 2024 should not be considered significant since exchange trading of hard currencies ceased during the summer. In essence, the exchange rate set by the Russian Central Bank did not reflect reality, as it was an artificially determined figure.
In June 2024, the European Union and the United States imposed sanctions on the Moscow Exchange and its subsidiaries, including the National Clearing Centre and the National Settlement Depository. Consequently, trading in the US dollar, euro, and Hong Kong dollar came to a halt. Nevertheless, the currency market in Russia did not completely collapse. The exchange continued trading in Chinese yuan, which is now the most popular currency on the local foreign exchange market. Notably, the exchange stopped publishing trading statistics in the second half of July, apart from the exchange rates of the currencies still traded there.
Trading in major global reserve currencies shifted to unofficial channels, where exchange rates were often established arbitrarily, sometimes by decree. Certain currency buyers gained access to purchasing foreign currency on orders from senior government and Central Bank officials, while exporters were required to sell their foreign exchange earnings. This arrangement appeared irregular and artificial. However, the primary source of foreign currency – Gazprombank – remained operational, channelling foreign currency revenues from the export of gas and oil into Russia.
On 21 November, the US Department of the Treasury implemented a sanctions package targeting Gazprombank and over 50 Russian and non-Russian financial institutions, as well as senior Russian financial officials. The US also warned that financial institutions in third countries cooperating with Russia’s SPFS would be considered high-risk.
The market reacted in two stages. Initially, the rouble weakened from 100.6 roubles per dollar on 20 November to 104.3 roubles per dollar on 22 November. This was an immediate reaction. By 27 November, the rouble had fallen further, reaching 113.15 roubles per dollar – its lowest level since the full-scale invasion of Ukraine began in February 2022.
To stabilise the currency market, the Russian Central Bank decided to halt its purchase of hard currencies from 28 November to 31 December. This measure mirrors similar action taken in August 2023 when the rouble began to slide against the dollar, with the restriction in place until the end of 2023.
Russian top officials have tried to present a calm front, offering reassuring yet demagogic speeches. For instance, Finance Minister Anton Siluanov claimed that the weaker rouble would benefit Russian exporters. However, it is well known that rouble devaluation exacerbates inflation. According to Reuters, inflation could rise to 10% annually, up from the current 8.5%, as a result of the devaluation. This is despite the Central Bank’s base interest rate being set at 21% on 25 October, following an already substantial 19% earlier.
The Central Bank has also pledged to sell foreign currency via the sovereign National Wealth Fund. Plans for the second half of the year include selling the equivalent of 8.4 billion roubles daily, primarily in Chinese yuan, which is increasingly becoming Russia’s key reserve currency. The rouble’s exchange rate against the yuan has also fallen past 15, the lowest since March 2022.
How significant is the yuan to Russian finances? For example, Economy Minister Maxim Reshetnikov acknowledged that 82% of Russian exports and 78% of imports are settled in roubles and “friendly” currencies from non-Western countries, primarily yuan.
Experts predict a temporary stabilisation and even a slight strengthening of the rouble during the tax payment period when Russian exporters are compelled to sell more foreign currency for roubles. However, this effect is expected to be short-lived. Ukrainian diplomats and officials are actively advocating for stronger sanctions against Russia, arguing that limiting access to the global financial system could curtail Moscow's ability to sustain the war and procure components for advanced weapon production.