Vast China-Russia resources trade shifts to yuan from dollars in Ukraine fallout

SINGAPORE: China has dramatically increased use of the yuan to buy Russian commodities over the past year, with nearly all of its purchases of oil, coal and some metals from its neighbour now settled in the Chinese currency instead of dollars, multiple trading executives with direct knowledge of the matter told Reuters.

The switch to yuan to pay for much of a roughly $88 billion commodities trade in the wake of the Ukraine war accelerates China’s efforts to internationalise its currency, at the expense of the dollar, although strict capital controls are expected to limit its global role in the near term.

In March, the yuan - also known as the renminbi - became the most widely-used currency for cross-border transactions in China, overtaking the dollar for the first time, official data showed, although its share as a global payments currency remains small at 2.5%, according to SWIFT, compared with 39.4% for the dollar and 35.8% for the euro.

Chi Lo, senior investment strategist at BNP Paribas Asset Management in Hong Kong, predicts a long-term “snowball effect” as more countries join the “RMB bloc” to reduce risks of dollar exposure, “especially after they’ve seen what the US-led sanctions against Russia have done,” he said.

“This is a very long term development stretching into the coming one or two, even three decades,” he said.

“For now, and for the foreseeable next few years, I think the trade using RMB will predominantly be used for commodity and energy trade.” Despite Beijing’s push beginning over a decade ago to internationalise the yuan, the currency had only been used sporadically in big Chinese commodities purchases given that most global trading of oil, gas, copper and coal is priced off dollar-based benchmarks.

That began changing last year as western buyers shunned purchases of Russian goods in the face of mounting sanctions following Moscow’s invasion of Ukraine.