Band Samuel Shen and Andrew Galbraith
SHANGHAI, February 28 (Reuters) – As Western governments tighten sanctions on Russia over its invasion of Ukraine, Moscow’s emerging market allies are exploring trade and financing channels to keep going.
The other members of the former BRIC group – Brazil, India and China – are moving cautiously lest they stumble over sanctions, but the beginnings of a parallel financial system centered on Beijing are becoming apparent.
The United States and Europe have banned major Russian banks from the main global payment system SWIFT and announced other measures to limit Moscow’s use of a $640 billion war chest.
Thus the will of emerging market giants to maintain trade relations with Russia highlights a deep divide over Europe’s biggest crisis since World War II and threatens to unravel the US dollar’s dominance in global trade.
Chinese companies and banks are now scrambling to limit the impact of sanctions on their relations with Russia, with a settlement of transactions in yuan which should increase at the expense of the dollar. Western brakes, aimed at excluding Russia from the global financial system, could also deepen business ties between Moscow and Beijing.
In India, as concerns grow over the continued supply of Russian fertilizers, government and banking sources say there is a plan to get Russian banks and companies to open rupee accounts with a few state-owned banks. for the settlement of exchanges within the framework of a barter system.
Brazilian President Jair Bolsonaro has said his country will remain neutral in the conflict.
Deng Kaiyun, who heads the Zhejiang Chamber of Commerce which represents Chinese private companies that trade with Russia, said doing transactions without SWIFT was not a big deal as the two countries started dedollarization a while ago. five years.
“Yuan-ruble settlement has become a normal business in big banks these days… We businessmen are already used to it,” Deng said, adding that the yuan is becoming more and more popular with of the Russians.
The sanctions are pushing Russian and Chinese companies to open accounts at Chinese banks that have branches in Russia, said a Moscow-based lawyer who represents Chinese companies.
“SWIFT is not the only payment system. If you block this channel, businessmen have to find alternatives,” said the lawyer, who declined to be named due to the sensitivity of the matter.
A Chinese state-owned bank source who declined to be identified said “exporters are now in favor of using the yuan to settle their payments” with Russia. Some of these transactions were settled in euros or dollars until last week.
A source from another state lender said that given the lack of details on Western sanctions, the bank is closely monitoring the situation while encouraging customers to use the yuan in trade settlements with Russia.
Yuan settlements already accounted for 28% of Chinese exports to Russia in the first half of 2021, up from just 2% in 2013, as China and Russia step up efforts to reduce their dependence on the dollar, while developing their own respective transversal agreements. border payment systems.
The current crisis could accelerate the trend.
Dang Congyu, an analyst at Founder Securities, writes that the SWIFT sanctions against Russia are “a landmark event that will accelerate the process of de-dollarization.”
“Although it is difficult to replace SWIFT in the short term, this incident is very beneficial for the globalization of the yuan in the long term.”
Dedollarization efforts are not limited to trade.
Investment firm Caderus Capital said it was working to promote cross-border investment between Russia and China.
Managing Director Andrei Akopian also hailed the Russian central bank’s decision to increase investment in yuan-denominated assets as “the best way to increase the popularity of the Chinese RMB among Russian investors.”
The yuan accounted for 13.1% of the Russian central bank’s foreign exchange reserves in June 2021, down from just 0.1% in June 2017. Dollar holdings fell to 16.4% from 46.3%.
“If we’re talking about trade and investment, it makes perfect sense that the two countries don’t trade in US dollars, because then you have double conversion, on top of other difficulties recently,” Akopian said.
But the pain for many Chinese companies is immediate, with a volatile ruble and unfulfilled trade contracts.
“Everyone is focused on maintaining or reducing existing business right now. No one is talking about new business. That’s what I hear from all sides, including Chinese clients,” said a lawyer who requested anonymity.
Han-Shen Lin, senior adviser to the Asia Group and a former banker, also warns that Chinese banks could come under greater scrutiny in the face of Western sanctions against Russia.
“All Chinese banks know that global US dollar clearing banks will ask Chinese banks to get involved in sanctions-related counterparty transactions,” Lin said.
“What will be interesting is how Chinese banks can separate sanctioned transactions from non-sanctioned transactions,” such as energy-related companies.
(Reporting by Winni Zhou, Andrew Galbraith, Samuel Shen in Shanghai; and Ma Rong in Beijing; Additional reporting by Alun John; Editing by Vidya Ranganathan and Toby Chopra)
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