Russia’s apex bank restricted to Yuan for reserves

Russia’s central bank is facing challenges amid tightening Western sanctions, leading it to consider the Chinese yuan as a primary option for its reserves due to limited alternatives.

In a recent report, the Central Bank of Russia highlighted the yuan’s stability and liquidity compared to currencies from countries “not unfriendly” to Russia, which it deemed less stable and liquid. The bank emphasised the yuan’s role in forming reserve assets, citing its increasing international currency status and liquidity in recent years.

This reliance on the yuan reflects Russia’s growing isolation in the international trade and finance system, driven by Western sanctions. It also underscores the yuan’s emergence as a challenger to the US dollar’s dominance in international trade and reserve currency status.

The West’s use of the dollar-based financial system to punish Russia has prompted some countries to diversify their currency reserves, with Russia increasingly turning to the yuan for trade and financial transactions, particularly with China and third countries.

Despite efforts to steer trade towards alternative markets like India and China, Russia faces challenges from tightening Western sanctions, especially secondary sanctions targeting companies doing business with Russia. This reliance on the yuan poses risks for Russian companies borrowing in the currency, with increased lending costs reported.

Russia’s central bank holds significant international reserves, including assets frozen by Western sanctions, which are being eyed for the reconstruction of Ukraine.