Russia-China Trade Stifled by Yuan’s Surge Against Ruble

(Bloomberg) -- It has just got a lot more expensive for Russia to deal with its biggest trade partner China. 

The yuan hit a record high against the ruble this week -- surging by as much as 25% on Tuesday alone -- as sanctions were levied against the Russian central bank. Some Chinese banks have suspended trading of the currency pair, with signs of distress showing up in the widest ever bid-ask spread. 

The sudden spike, and how it has put off currency trades, raises questions over the strategic relationship between both countries as Russia's ties with global markets get cut off one by one. Total bilateral trade between the two countries was valued at $112 billion in 2020, according to Bloomberg calculations based on data from the International Monetary Fund.

“China trade with Russia could face challenges like higher transaction costs and limited channels, but could still continue,” said Xiaojia Zhi, analyst at Credit Agricole CIB Hong Kong Branch. Russian demand for Chinese goods could deteriorate, but both nations could start promoting trade settlements in yuan, she said.

For now, dwindling volumes in the yuan-ruble currency pair are adding to concerns. The gap between the bid-ask price had been widening even before Russian invaded Ukraine, and reached a record 152 pips Thursday. This implies waning interest from brokers to trade due to the ruble's wild swings. 

At least two mid-sized Chinese banks have suspended proprietary trading of ruble-yuan and ruble-dollar to control risks, according to traders who asked not to be identified as they're not authorized to speak publicly.

The ability to trade ruble against the dollar had also almost vanished for international investors this week. The Russian currency dropped about 25% this week in onshore markets, spurring the central bank to hike rates and impose capital control.

China was seen a potential bulwark for Russia, with Beijing saying it won't impose any financial sanctions, and that it hopes to keep trade normal. 

“I wouldn't be surprised if more of the China-Russia bilateral trade will be settled in yuan,” said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore. “However, given that Russia's biggest trading partner is still the EU, tight forex liquidity will likely prevail in Russia,” she said.

The PBOC also has a multi-billion dollar currency swap (150 billion yuan versus $1,750 billion in ruble) with Russia's central bank, allowing the two nations to provide liquidity to businesses to continue trading. The PBOC could offer a swap or exchange dollar reserves for Russia's gold reserve, according to Capital Economics, though any dollar assets newly acquired by Russia's central bank would still be sanctioned.

Reserve Buffer

About 13% of Russia's reserves, or an estimated $77 billion, were in Chinese assets as of June 2021, according to the most recent figures from the Bank of Russia. Russia's central bank and sovereign wealth fund probably own a combined $140 billion worth of Chinese bonds, according to estimates by Australia & New Zealand Banking Group Ltd.

Moscow could use its foreign reserves in China to finance imports from the country, Natixis SA economist Alicia Garcia Herrero said in a report Wednesday. It could also utilize the swap line with the People's Bank of China to pay for imports when the reserves are drawn down, she said. 

The limited size of the reserves though means that they could “be depleted within a year” or even earlier due to the ruble's depreciation versus the yuan, Herrero said.

©2022 Bloomberg L.P.

With assistance from Bloomberg