In a state of war economy, Russia has survived and is victorious in a currency war that was declared against it by the West. Urals oil exports in local currencies, mainly with China and India, as well as the failure of sanctions on Russian energy goods boosted the country’s foreign exchange reserves and prevented the collapse of the economy as planned by the US.
Russia held enough foreign exchange reserves in yuan and gold even after the imposition of sanctions by the US and allies, Bank of Russia governor Elvira Nabiullina said in her annual report to parliament on Thursday (December 14th). Continuing a multi-year effort to reduce exposure to the US currency, the central bank cut the dollar’s share of reserves to 10.9 percent on Jan. 1 from 21.2 percent a year earlier. However, euro holdings rose to 33.9% from 29.2%, the central bank said.
Yuan holdings rose to 17.1 percent from 12.8 percent a year earlier, while gold fell slightly to 21.5 percent of the country’s central bank’s reserves. The US and its allies imposed sweeping sanctions on Russia after the military operation in Ukraine on February 24, including limits on central bank reserves. Russian officials have said the sanctions have “frozen” about half of their $642 billion in reserves.
“This extraordinary situation will lead to wide-ranging changes in monetary policy,” Nabiullina noted in her report highlighting the eastward turn of the Russian economy. “The difficult process of adapting to the new conditions will inevitably lead to a contraction of the GDP, but the Russian economy will be able to return to a growth trajectory,” it is pointed out.
Invasion of Chinese banks
At the same time, Western banks’ exposure to Russia is falling to pre-Soviet levels as sanctions curtail business and lose ground to Chinese banks that are benefiting from a growing yuan stake in foreign exchange reserves.
Banks from Europe and the US will have less than $60 billion of exposure to Russia this year, compared with about $40 billion in the late 1980s and $10 billion at the start of that decade, according to a study by Trust Economics. This is a record negative from $119 billion in 2021, before the Kremlin ordered the invasion of Ukraine.
The transformation of the banking market reflects the growing rift between Russia and Western countries in the wake of sanctions over the military operation in Ukraine.
It also highlights China’s success in emerging as an alternative economic partner and benefiting from Russia’s shift to Asian trade routes. Chinese banks are likely to play at least a similar role to Western banks before the conflict in Ukraine as an agent of financial stability and a good conduit of foreign trade. Western banks are expected to be hit hardest by further declines in foreign trade volumes.
The yuan accounted for about 50% of trading on the Moscow Stock Exchange in October. About a third of Russia’s foreign trade was settled in Chinese currency in September.
The Displacement
China’s “Big Four” have seen their combined assets in the Russian financial space quadruple since the end of 2021, and Chinese banks are generally just short of displacing their Western counterparts in the country in terms of interbank reserves. Chinese banks have been slow to increase their market share in loans and deposits.
At the same time, Western bankers’ efforts to reduce their exposure to Russia have seen them lose market share to local banks. Local banks have recovered from the initial hit from the sanctions.
Russia’s banking sector’s total profits for the first nine months of the year surpassed the previous annual high since before the war in 2021.
The country’s largest bank, state-owned Sberbank PJSC, which along with all major players in its market as the banking system is cut off from the SWIFT international payments system, is poised to post record ruble profits this year. The four largest units of Western banks still operating in Russia had a market share of around 1% in the third quarter, up from 3% in 2021.
