Russian banks have recently begun limiting the number of loans they offer in yuan due to liquidity problems. Heavily sanctioned in the wake of the Ukraine war, Russia has increasingly relied on the yuan, particularly in trade with China. However, cracks are starting to appear in this strategy. Russian banks and companies are struggling with yuan shortages, driving up the cost of borrowing and leaving tens of billions of dollars in unsettled trade hanging in the balance. Moreover, the situation is expected to worsen in the short-term given ongoing Western sanctions and fears of secondary sanctions among China’s top banks, creating new inflationary pressures for the Russian economy.

Western export restrictions and domestic curbs on imports and dollar transactions have combined to produce shortages of critical goods and technologies in Russia since the launch of the Ukraine war. With much of Russia’s domestic manufacturing redirected toward military production, the demand for imports has risen. In response, China, Russia’s largest trading partner, accounting for a third of its foreign trade in 2023, has stepped in to provide essential industrial equipment and consumer goods, while also offering export markets for Russian oil, gas, agricultural products, and metals. For example, after nearly all Western automakers left Russia, Chinese auto exports to surged 593% between 2022 and 2023, accounting for as much as 15% of China’s total auto exports. Truck exports alone increased 700% in 2023.

Western sanctions have largely cut off Russia’s access to dollars, and countries like China are unwilling to accept rubles due to their lack of convertibility and usability. This has prompted Russia to increasingly use the yuan for trade settlements. The approach worked well during the first two years of the Ukraine war, but Chinese banks are now growing cautious about secondary sanctions from the United States and other Western nations for aiding Russia. Consequently, tens of billions in payments to Russian suppliers have been delayed, slowing yuan inflows. Although the Bank of Russia has increased its yuan reserves since the war began, it hasn’t been enough to resolve liquidity issues, especially as most imports from China must be paid in yuan. Additionally, a significant trade imbalance between Russia and China further exacerbates the issue of yuan payments.