Ruble-yuan settlements booming, set to reshape global finance

Russian President Vladimir Putin (L) and Chinese President Xi Jinping (RIA Novosti / Michail Metcel)
Settlements in local currencies between Russia and China now account for 7 percent of the bilateral trade, but the potential for growth is tremendous, experts tell RT. Yuan-ruble trade in Russia has grown 800 percent in a year.

Growing cooperation between Russia and China has become one of the hottest topics in the global economy. It is signaling the emergence of a strong alliance of one the world’s richest and strongest economies, which is expected to reshape the existing western-dominated economic model.

While energy deals between the resource – rich Russia and resource – hungry China look natural, bringing the countries’ finances closer looks like a real challenge to the US dollar system, experts agree, although the transition won’t be quick.

“The transition from the usual scheme of payments in major currencies is not a quick process, but with a certain political will and sufficient mechanisms of hedging currency risks in exports and imports it is quite feasible,”Aleksandr Prosviryakov, Treasuries & Commodities Manager at PWC, told RT. He added that the first step towards this was the signing of a three-year agreement on currency swap worth 150 billion yuan in October 2014.

Currency swaps allow companies in both countries to use national currencies in mutual settlements. That means the Russian importers can purchase Chinese products with yuan, and the Chinese can make payments in rubles.

READ MORE: Ditching US dollar: China, Russia launch financial tools in local currencies

“We see a pretty rapid intensification of trade in the yuan-ruble currency pair in Russia,” he said adding that the volume on the Moscow Exchange increased by 8 times in comparison with the previous year, and 6 times in the OTC market.
Prosviryakov said the agreement to supply Russian oil to China through the Eastern Siberia - Pacific Ocean pipeline was the first major project implemented through settlement in local currencies.

An increased use of national currencies by major exporting and importing countries will lead to a reduction in the share of traditional currencies in international payments, he added.

The US dollar still remains preeminent in global trade; more than 80 percent is settled in dollars and 60 percent in international reserves. However, in 2014, the yuan leaped to nine percent of international settlements, which gives a chance that its role in the world financial system will become more important.

“There is a reason to believe that this trend will continue in the coming years and the role of the yuan will increase rapidly not only in international trade, but as the currency of international reserves of the central banks,” he said.

China's decision to establish and lead the Asian Infrastructure Investment Bank (AIIB) is“the real crux of Beijing's current long-term international economic and financial strategy,”Brendan O'Reilly, China-based writer and educator told RT.

“Now Beijing is making its own global bank that can compete with Western-dominated institutions,” he said.

Fifty-seven countries have been approved as founding members of AIIB with Russia expected to become the bank’s third largest participant.

“I think Russia's participation in AIIB will have a positive impact on economic and trade cooperation between the two countries,”said Prosviryakov.“One of the bank’s main tasks is financing infrastructure projects, a large part of which will be located on the territory of Russia. Investments in infrastructure will contribute to the development of bilateral trade, which will increase the likelihood of achieving the ambitious goal of the two countries to increase the turnover to $200 billion dollars by 2020.”

Even US allies such as Germany and the UK have signed on despite American objections, O'Reilly said.

“If the AIIB succeeds in its long-term goals of supporting Eurasian transport and trade infrastructure, then China, Russia, and many other states stand to benefit enormously,” he said.