The yuan became the third most traded currency in terms of volume of foreign exchange trading on the Moscow Exchange in July and will soon take second place, The Bell reported on August 8.

Cut off from the international financial system, Russian businesses have been swapping to the unsanctioned yuan and other currencies in their effort to ditch the dollar. Russian banks that have accumulated significant reserves of dollars and euros are in the process of dumping them, as they are unable to spend them and afraid of sanctions freezing these assets.

In January and February, the volume of the yuan-ruble trade on the Moscow Exchange was circa RUB2bn rubles a day. By June it was up to RUB25bn and in recent weeks the volumes have hit RUB70bn rubles ($1.1bn), The Bell reports.

As Russia’s biggest single trade partner, the yuan holds pride of place in Russia’s foreign exchange markets. The volume of yuan traded in July was up 8pp to reach circa 20%, or RUB890bn ($14.6bn), Kommersant reports. At the start of this year the yuan trading volumes accounted for a mere 0.5% of the exchange’s turnover.

The yuan trading has been overtaking the volume of euro trading and on occasion in July overtook it in terms of volume of trading.

The shares of other exotic currency trading are far smaller. The Hong Kong dollar and the “friendly” Kazakh tenge are relatively popular, but the volumes traded are two orders of magnitude smaller: traded volumes in July were RUB4.8bn and RUB4bn respectively. The volumes of the currencies of two more of Russia’s key trade partners, the Turkish lira and the Belarusian ruble, see even smaller volumes: RUB2.6bn and RUB1bn respectively.

“The growing popularity of the yuan is a consequence of the rapid decline in the role of the now "toxic" dollar and euro in all aspects of Russia's economic activity,” The Bell comments. “Part of this trend is the de-dollarisation policy of the central bank, as well as banks and brokers that have introduced commissions for foreign currency accounts.”

Another factor driving the trade is imports have started to recover after coming to an almost standstill in March after the Russian invasion of Ukraine. According to Chinese data, in the first half of the year trade with Russia grew by 29% y/y to $97.7bn.

China remains top dog as Russia’s biggest trade partner and is on course to maintain the $100bn trade turnover of recent years, but aspires to double their mutual trade to $200bn in the coming years. In 2021, trade between the two countries totalled $174bn, up 36% on the year before, and if trade volumes maintain the same pace set in the first half of this year, the goal of reaching $200bn of mutual trade should be achieved.

The importance of the yuan is expected to only increase due to a variety of factors including: the arrival of Chinese companies (especially state-owned) on the Russian market looking to buy cheap assets; the resumption of investment imports, the first signs of which are already seen by the central bank; overall growth in trade with China, which by the end of the year may reach $185bn-190bn, according to the CBR; and, adaptation to the yuan of the Russian exchange infrastructure (in the segment of swaps, the yuan is already on an equal footing with the dollar).

Given that funds held in dollars and euros can be frozen at any time, the yuan in Russia naturally becomes not only an alternative for settlements and risk hedging, but also an important part of the financial system.

Banks are already massively offering deposits in yuan (at 1-2% per annum), and Russian companies like the Hong Kong listed aluminium producer Rusal have started to borrow in the Chinese currency on the domestic market.

Last month Rusal became the first major Russian company to place bonds worth RUB17.6bn in the Chinese currency on the domestic market. The placement was a big success as demand outstripped supply almost threefold. Rusal immediately invited applications for another issue of a similar size.

The “yuanisation” of the Russian economy already began several years ago after the CBR started dumping dollars from its international reserves and replaced it with the yuan. Russia currently holds 13.1% of its $630bn reserves in yuan, more than any other country.

Russian banks with frozen funds in foreign currency in other countries have been allowed to suspend operations with businesses in those currencies until the restrictions are lifted, Russian President Vladimir Putin decreed in the first week of August.

The decree shifts the risks of freezing the currency from banks to companies and should stimulate the transition of businesses to the yuan and other currencies of “friendly” countries, according to experts interviewed by The Bell.

The decree says banks that, due to sanctions, cannot claim their funds from foreign credit institutions now have the right not to pay out individual entrepreneurs' or companies’ funds on deposit in the currency in which operations have become impossible. The right applies only to obligations that arose after the publication of the decree, the document notes.

In addition, the decree gives companies the opportunity, in the event of sanctions, to open special ruble accounts of type “D” to fulfill obligations to non-residents on Eurobonds.