Written by Elena Fabrichnaya
MOSCOW (Reuters) – The expiration of a U.S. license allowing transactions involving pillars of Russia’s financial infrastructure could make doing business with Russian companies more difficult and costly, sources involved in imports and payments told Reuters.
The yuan, which hit a near one-year high against the ruble on Wednesday, has become the most traded foreign currency in Moscow since Russia’s decision to send troops to Ukraine in February 2022 sparked sweeping Western sanctions and an intensification of Russia’s dedollarization policy.
With Chinese banks wary of the risk of secondary sanctions for dealing with Russian entities blacklisted by Washington, and the Bank of Russia reluctant to continue pumping yuan liquidity through foreign exchange swaps, some importers fear payment issues between Russia and China could escalate.
“The situation may change after October 12. There may be a sudden shortage of yuan or Chinese banks may refuse to accept payments from Russia altogether,” an importer told Reuters.
Yuan liquidity shortage
In June, the US Treasury Department’s Office of Foreign Assets Control imposed sanctions on the Moscow Exchange and its clearing agent, the National Clearing House, resulting in an immediate halt to dollar and euro trading on Russia’s largest exchange.
The Foreign Assets Control Authority issued a license that is set to expire on October 12, allowing some transactions to be completed. The Foreign Assets Control Authority did not respond to a request for comment when asked whether the license could be extended again.
A source in the payments market said that when this deadline expires, all transfers, including those of subsidiaries of Chinese banks, will stop, and all foreign exchange positions opened through the Moscow Exchange will be closed and suspended.
“Accordingly, the situation regarding yuan liquidity supply will become more difficult,” the source added.
Billions of yuan in payments are at a standstill as Chinese state banks shut down transactions with Russia, Reuters reported last month, with many transactions facing long delays, increased logistics costs and higher agent fees.
Matters are further complicated by the fact that the Russian unit of Austria’s Raiffeisen Bank International has refused to make payments to China since September, according to a person familiar with the matter.
The Reserve Bank of India declined to comment.
Systemic risk
The central bank acknowledged the repayment problems and urged commercial lenders to reduce their yuan loan portfolios because this exacerbates the yuan liquidity shortage by forcing the central bank to replenish short-term yuan stocks and pushing up swap rates and market volatility.
“The central bank is somehow trying to stop the yuan shortage, with swap rates… last week reaching 120%,” said Alexander Butavin, a financial analyst at FinM, describing the risks as systemic for Russia’s largest companies.
Central bank data showed banks cut swap loans to 15.4 billion yuan ($2.19 billion) on Wednesday from a peak of 35.2 billion yuan in early September.
“If the yuan is actually delisted from the Moscow Exchange, there will be no ruble exchange rate benchmark. The yuan rates will be formed on the basis of the results of trades in the interbank market, which is completely opaque, manipulable and volatile,” Butavin said.
(1 USD = 7.0184 Chinese Yuan Renminbi)