Russia’s Dependence on China May Not Be Enough to Save Economy

Executive Summary:

• Russia’s increasing reliance on China for trade underscores potential vulnerabilities due to China’s economic woes and the yuan’s currency controls. This is prompting Russia to aggressively pursue the digital ruble.
• Despite Western sanctions, Russia-China trade has increased, enhancing bilateral commerce and financial cooperation. Trade is also increasingly denominated in yuan and rubles, furthering the two countries’ goals of de-dollarization.
• Russia’s economic growth relies heavily on state spending for military purposes, potentially leading to inflation and social unrest. The push for a digital ruble aims to manage these challenges, but highlights long-term economic vulnerabilities.

On January 29, the Central Bank of Russia declared that it is in talks with BRICS member states about adopting “digital currencies” to facilitate international commerce. It emphasized the potential for integration of the digital ruble (CRDR) into the global economy with similar foreign currencies and usage in international trade. The CRDR, however, has yet to be launched properly. Banks and retailers are progressively joining a pilot program, bringing testing to millions of customers across regions (Crypto News, January 31). In August 2023, Anatoly Asakov, a member of the Russian State Duma, suggested that Russia might soon use the CRDR in its trade with China (TASS, August 15, 2023). Russia’s rising reliance on China, however, might swiftly become an issue, given China’s economic woes at home. Moscow is likely concerned about such developments because the yuan is not freely convertible because Beijing imposes controls on its value. The likelihood of a Chinese financial crisis, which was widely discussed in January, does not inspire confidence in Moscow (International Banker, January 18). This is likely one of the reasons Russia is aggressively pushing for a full launch of the CRDR.

When the West imposed sanctions on Russia, China filled the gap for many Russian imports. By the end of 2023, trade between Russia and China reached $240 billion, marking a 26.3 percent increase compared to 2022, when it had reached a record high of $190 billion in 2022, which was in turn a 29 percent increase from 2021 (General Administration of Customs of the People’s Republic of China, accessed February 7). Russia stopped providing customs statistics in April 2022, but local reports have confirmed these numbers (Russian International Affairs Council, January 6). While sufficient information is available on Russian energy exports to China and Chinese exports of cars, machinery, electronics, plastics, and alumina, which have critical military applications, little is said about their financial relationship.

 The expansion in bilateral commerce has resulted in most trade being denominated in national currencies. The yuan’s share in the Russian exchange and over-the-counter markets reached 46.2 percent and 31.5 percent, respectively, by November 2023 (Central Bank of the Russian Federation, November 2023). Chinese banks have also increased their assets in Russia, lending to Russian banks and companies with whom Western organizations to engage. Specifically, the “big four” state-owned banks in the People’s Republic of China (PRC)—Industrial and Commercial Bank of China (ICBC), Bank of China, China Construction Bank, and Agricultural Bank of China—have boosted their assets in the country.

 The presence of subsidiaries of these Chinese banks is due to a considerable increase in the customer base generated by Chinese firms entering the Russian market. They also serve as settlement banks in Russia for Chinese firms, government agencies, Russian companies, institutional customers, joint ventures, and multinational organizations. In addition, the Bank of China specializes in correspondent banking for Russian banks. Officially, these banks’ initiatives are part of a larger effort to increase the use of the yuan in Russia rather than dollars and euros, allowing the Kremlin to pride itself on its essential contribution to the “de-dollarization” of international trade.

 On January 31, Russia’s largest security and banking organization established a “council” to self-regulate digital assets (Crypto News, January 31). On February 1, Russia’s Central Bank stated that 17 additional institutions, including heavyweights such as Sberbank and Tinkoff, had joined the pilot (Crypto News, February 1). The push for adopting the CRDR is not only to offer an alternative for the de-dollarization of international trade but also to manage Russia’s growing socioeconomic problems. While Russia’s economy defied all expectations in 2023, surpassing its 2021 levels, with GDP registering notable increases, it has done…