Has yuan become Russia's new dollar?
Russia could use the Chinese yuan to bypass the crippling sanctions and SWIFT payment ban imposed by the US and its allies.
One rouble now buys less than one US cent, causing ordinary Russians to flock to stores of value such as gold and bitcoin (BTC-USD) to protect themselves from the fallout.
As Putin's armoured divisions roll closer to Kyiv, his country's economy rolls closer to the abyss, and speculation has grown that Moscow will resort to using cryptocurrencies as a financial back-channel.
However, there is simply not enough volume and liquidity within crypto markets to offset the disruption that sanctions will have on the Russian economy.
This leaves the Kremlin with another option: to use the Chinese yuan and Beijing's CIPS international payment system for cross border trade.
Disconnecting Russia from world finance could thus create an unwanted side effect for the west, the birth of a new global economic system based upon the Chinese yuan.
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Steve H Hanke, professor of applied economics at Johns Hopkins University, told Yahoo Finance UK that "disconnecting Russia from the dollar-based system won't have much of an impact on the dollar initially, but in the long run it might be a different matter".
The senior economist added that the act of removing Russia from the SWIFT dollar-denominated international payments system “has weaponised and contaminated SWIFT”.
"This will make room for challengers to the dollar-denominated international system."
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The major challenger is China's Cross-border Interbank Payment System, or CIPS.
China’s competitor to the dollar-based SWIFT system was created in 2015 and currently only handles a fraction of the international claims settlements that are completed by the SWIFT system.
But this imbalance could begin to tilt in China's favour if Russia is forced to rely upon it for international trade.
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State media in China likened the SWIFT ban on Russian banks to “a financial nuclear weapon”, but also welcomed it as an opportunity for Beijing’s CIPS.
Hanke said the recent political interference with SWIFT was “accelerating the development and use of CIPS, regardless of whether Russia utilises it or not".
Russian reliance upon CIPS will allow China to develop the yuan's use outside the country’s borders.
Chinese president Xi Jinping's pet infrastructure project, the Belt and Road Initiative, has also helped to introduce the yuan overseas.
But Steve Tsang, director of the SOAS China Institute, said that there is still only marginal use of the yuan and it is "still nowhere near being a global currency".
"While Russia will make more use of the yuan, the yuan cannot replace the dollar as the global currency as full convertibility is required for any currency to be accepted as a full global currency or a major reserve currency.”
The Chinese government is unwilling to allow the yuan to be freely traded in case they lose control over its value.
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In the past, Beijing has been accused of strict mercantilism, after claims that the yuan was being artificially undervalued against the US dollar to give Chinese exports an unfair price advantage.
Geopolitical analysts are anxious about the future, as Hanke suggests that sanctions have a record of failing to meet their desired objectives.
He said that the full economic isolation of Russia could create a "nightmare scenario in which an 'enormous North Korea' emerges, one with nukes".
Tsang sees signs the world is on a trajectory towards a new Cold War in which "Russia and its close allies will form one bloc and the democracies led by the west forming another".
However, he added that China will maintain a cautious approach that will be pragmatic for its own interests and avoid "attracting secondary sanctions against Chinese institutions".
Anders Corr, publisher of the Journal of Political Risk, reinforced the view that sanctions against Russia would “drive the country towards China’s economy, through which it will have to do most of its business until the sanctions are lifted”.
Corr believes Russia’s tilt towards China will give Beijing immense bargaining power.
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He said that Moscow “may in future have to accept contracts denominated in yuan or even a 10% discount for its exports compared to world market prices”.
Beijing would certainly welcome the increased trade in much needed Russian commodities at record low prices.
Russia is already running a trade surplus with China, with major exports of oil, gas, coal and wheat being channelled towards its resource southeastern neighbour.
Chinese state banking regulators have already made it clear they will continue to maintain normal economic and trade exchanges with Moscow.
If Moscow begins to use CIPS it would further Beijing’s ambitions to slowly erode the world's dollar-dominated financial system.
Xi Jinping may well welcome Putin’s commodities in exchange for Chinese yuan and both autocrats could walk hand in hand down the road to “de-dollarisation”.
