2024-04-09 23:11:06
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Chinese President Xi Jinping remained loyal to Vladimir Putin for years. But Western sanctions are apparently putting the economic relationship to the test.
Moscow – Russia’s dependence on China is currently bringing Vladimir Putin anything but advantages: in the wake of Western sanctions, several credit institutions are suspending payment transactions with Russia. China’s central banks also want to restrict business with Russia – with disastrous consequences for Russia’s economy.
Russia’s economy under pressure because of sanctions from the West
Over the years, Putin has built up the Chinese currency, the yuan, as Russia’s main reserve currency. But recently more and more Chinese institutions have stopped accepting yuan payments from Russia. Russia actually wanted to continue doing business with China in the financial sector, but China is apparently declining in the new talks. According to Russian Finance Minister Anton Siluanov, no agreement has yet been reached on taking out loans in the Chinese currency Yuan.
Putin and Xi are long-time allies. But Western sanctions are putting the close relationship to the test. © Dmitri Lovetsky/dpa
The Chinese yuan plays an important role in Russia’s economy – and in Putin’s path to independence from the US dollar. “Over 80 percent of trade transactions between Russia and the People’s Republic of China are carried out in rubles and yuan,” Putin said in 2023, according to an official English transcript of his speech at the annual meeting of the Shanghai Cooperation Organization (SCO).
Consequences for Putin’s economy: Russia’s business with China is on hold
In a recent report, Russia’s central bank admitted it had limited options other than the Chinese yuan for its reserves. According to the Russian Central Bank, the role of the yuan as an international currency and its liquidity have increased “noticeably” in recent years.
Russian companies that borrow in Chinese yuan face increased borrowing costs, reported Bloomberg in March. Borrowing costs for short-term yuan bonds even rose briefly to 15.7 percent on March 1 before falling to 4 percent a few days later. Businesses are already under pressure from higher domestic borrowing costs since the central bank opted in February to keep interest rates at 16 percent to combat high inflation. Higher interest rates have left corporate borrowers with 1.2 trillion rubles more in debt costs. This emerges from data from the Russian consulting firm Yakov & Partners.
Sanctions work: Several banks let Putin run afoul
It’s not just Chinese banks that are feeling the pressure from the West in the wake of sanctions. Turkey in particular cut off some of its bank connections at the beginning of the year. Major lenders in the United Arab Emirates (UAE) have also started closing bank accounts of Russian citizens and restricting payment transactions with Russia, the business newspaper reported Vedomosti citing anonymous Russian business and government sources.
Russian oil companies are also faced with payment delays of several months or even transaction refusals because some banks from Turkey, China and even the UAE fear secondary sanctions. The news agency reported this Reuters citing eight sources familiar with the circumstances. The banks would require written guarantees from their customers that the money transferred will not end up with a company or person that is on the US sanctions list.
Sanctions and secondary sanctions
The US has been using so-called secondary sanctions for decades to give its primary sanctions more impact. This type of sanctions is intended to prevent individuals abroad from entering into or continuing business contacts with targets affected by US primary sanctions (such as Russia).
Western sanctions against Russia: Putin loses business partners
Western secondary sanctions have proven particularly effective in recent weeks. “The USA and Europe are now focusing on secondary sanctions in order to put pressure on these states and narrow the corridors,” explains Marcus Keupp, military economist at the ETH Zurich Military Academy Welt.
In addition to China, Russia could lose India as an important trading partner. India is considered one of the most important buyers of Russian crude oil. The news agency Reuters According to Indian refiners, there is currently concern about the new Western sanctions. In its latest sanctions package, the US blacklisted Russia’s shadow fleets.
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