Sanctions from Europe and the U.S. have moved to the Russian Central Bank, controlling 630 billion dollars of foreign exchange reserves. On the last day of February, the U.S. has increased its strict prohibition on transactions with the Russian central bank, intending to collapse the Russian economy and finance completely. However, there are about 77 billion dollars in Chinese assets in Russia’s foreign exchange reserves, leaving a critical question: Will China give a helping hand?
The UK Treasury said earlier on Monday that it would immediately stop people and companies from doing business with the Bank of Russia, the Ministry of Finance of the Russian Federation, and the Russian National Wealth Fund.
The U.S. and European Union keep working to end the list of banks that will be cut off from the SWIFT system, taking steps to stop Russia’s central bank from rescuing the nation’s economy.
This move is the most severe penalty, isolating Russia from the global economy.
In response, the Bank of Russia also planned to shield the nation’s 1.5 trillion dollar economy from the sweeping penalties.
The Russian central bank has a foreign exchange stockpile of 630 billion dollars, equivalent to 38% of Russia’s GDP. The Russian Central Bank has applied a de-dollarization policy to reduce the risk of sanctions, socking away wealth in euros, the Chinese yuan, and gold. Notably, as of June 2021, it held only 16% USD compared to 32% EUR, 22% gold, and 13% yuan.
Europe and the United States lock the Russian Central Bank as the target of sanctions, leaving the Russian economy in dire straits. According to Bloomberg, the Russian Central Bank is estimated to hold 77 billion dollars in yuan assets. If they can successfully sell these assets, they will provide Russia with much-needed liquidity.
Moreover, the People’s Bank of China and the Central Bank of Russia have also carried out billions of dollars in currency swaps, enabling both countries to provide liquidity to businesses.
Regarding the SWIFT dilemma, possible alternatives can be China’s domestic payment settlement system: The Cross-Border Interbank Payment System (CIPS) or Russia’s National Payment Cards System (NPCS).
However, their scales are too small compared to SWIFT. The Chinese system has only 75 direct participating and 1205 indirectly participating banks. Russia’s national payment system includes 486 funds transfer operators and over 500 payment agents and bank payment agents. SWIFT has over 11,000 member institutions globally.
Bloomberg showed the comment of the E.U.’s top diplomat, Josep Borrell, that China didn’t sign onto those sanctions. Besides, the U.S., Europe, and others couldn’t prevent Russia from accessing its reserves stored in Chinese assets.
Yu Lingqu, the vice director of the Center for Financial Studies at China Development Institute, said that “The Chinese assets and yuan in Russian foreign reserves can be an effective tool for Russia to counter the impact of U.S. and European sanctions.” He added that China is unlikely to follow the West in freezing Russia’s yuan assets, as both countries want to counter the hegemony of the United States and the dollar in the global financial system.
However, it is unclear whether China will support Russia and how Beijing’s dilemma can help its strategic partner Russia without violating Western sanctions.