The Chinese yuan is rapidly gaining popularity in Russia amid Western sanctions over the war in Ukraine.
Trading on the Moscow Exchange, the currency has risen more than 50 times this year, from 0.5 percent of total trades in January to 26 percent in August.
It is increasingly used in Russia’s international trading schemes, and several of its largest companies have begun issuing yuan-denominated bonds in an effort to raise capital.
Russians have also started stockpiling as a growing number of banks offer customers the option to open deposits in yuan.
Private individuals bought a record 4.5 billion yuan ($0.6 billion) last month, according to data from Russia’s central bank.
Analysts said Russia’s pivot to the yuan could boost China’s ambitions to promote more international use of its currency, while also helping Moscow evade Western sanctions aimed at decoupling the global financial system. .
“The popularity of the yuan is due to the increasing toxicity of the dollar and the euro to Russians,” said Alexandra Prokopenko, an independent analyst who previously worked as an adviser at the Russian central bank.
“As a result of sanctions, Russian accounts abroad can be frozen at any time, not all foreign banks are willing to cooperate with Russian banks and it takes a very long time to process transactions with dollars and euros,” she explains. “There are no problems with the yuan.”
Shortly after President Vladimir Putin ordered Russian troops to Ukraine, the United States and the European Union imposed sanctions on Russia’s central bank, its sovereign wealth fund and some of the country’s largest financial institutions.
The administration of US President Joe Biden also banned the export of dollar bills to Russia.
Russia has responded to these unprecedented sanctions by moving even closer to China.
In the first eight months of this year, trade turnover between the two countries is up 31 percent to $117.2 billion and officials have forecast it is on track to hit a record $200 billion by 2023.
Beijing has emerged as Moscow’s largest energy customer and Chinese companies have slowly begun to fill the gaps in the Russian market created by the mass exodus of Western companies.
“China is Russia’s largest trading partner, so it makes sense that there is a growing demand for yuan in the Russian market,” said Prokopenko. “Companies need yuan to conduct trading arrangements because under the current circumstances it is easier to do so in yuan than in dollars or euros.”
Since the start of the war, Russia has become the third-largest market for yuan payments outside mainland China, accounting for nearly 4 percent of international settlements with Chinese currency in July, according to the SWIFT payment system.
Earlier this month, state energy giants Gazprom and China National Petroleum Corporation signed a deal under which China would pay for Russian natural gas supplies only in yuan and rubles.
A growing number of Russian corporate giants are also trying to raise funding in the Chinese currency.
In the past two months, state oil conglomerate Rosneft, aluminum producer Rusal, gold miner Polyus and metallurgical company Metalloinvest have issued yuan-denominated bonds worth a total of 25.6 billion yuan ($3.7 billion).
Meanwhile, the Russian Ministry of Finance has announced plans to issue yuan-denominated government bonds, although preparations for the placement are widely expected to take at least another year or two.
Valery Yemelyanov, a stock analyst at investment company BKS Mir, told Al Jazeera that because of the high demand for the yuan in Russia, companies that had accumulated large amounts of currency could sell it at favorable interest rates.
“This is a fairly new experience for the Russian market, but a successful one so far,” he said. “Many companies are willing to bet on the yuan and plan their future business processes around it.”
Russian banks are also moving to expand their yuan offerings.
Russians can now open yuan-denominated accounts at 10 of the country’s 30 largest banks, state news agency RIA Novosti reported.
Earlier this month, VTB Bank and Alfa-Bank became the first two Russian banks to allow customers to transfer money to China in yuan without using the international SWIFT payment system.
Alexander Borodkin, the head of the savings and investment unit at the Otkritie bank, said this growing interest in the yuan was driven by the Russian banking system’s attempts to dump the dollar and the euro.
He explained that banks were actively trying to discourage customers from storing savings in dollars or euros by refusing to open new deposits in these currencies, offering bad rates or charging commissions.
“The ideal option for the banking system is to have all its customers convert their dollars and euros into rubles, but since not everyone will want to do that, it is good to have the yuan as an option for those who want to diversify their savings account” , he said.
Despite the yuan’s recent momentum, serious questions remain about the Chinese currency’s ability to replace the dollar and euro for Russia.
Yemelyanov of BKS Mir warned that because the yuan is not a freely convertible currency, the Russians could lose if Beijing decided to weaken the currency.
Another problem is that the yuan is liquid and less suitable for investment compared to the dollar or euro.
“Besides bonds and deposits, there aren’t many other ways you can use the yuan in Russia,” he said. “So if someone has significant capital, he will think 10 times about converting his resources from dollars and euros to yuan, because it is not so clear what he can do with it after that.”