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The Russian economy is worried, as sanctions put the agreement with China at risk

The Russian economy is worried, as sanctions put the agreement with China at risk

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Chinese President Xi Jinping has remained loyal to Vladimir Putin for years. But Western sanctions appear to be putting economic relations to the test.

MOSCOW – Russia's dependence on China brings with it a lot Vladimir Putin At the moment, there is nothing but advantages: as a result of Western sanctions, many credit institutions stop payment transactions with Russia. Chinese central banks also want to restrict business dealings with Russia – which would have dire consequences for the Russian economy.

The Russian economy is under pressure due to Western sanctions

Over the years, Putin has built up China's currency, the yuan, as Russia's main reserve currency. But recently, more and more Chinese institutions have stopped accepting yuan payments from Russia. In fact, Russia wanted to continue engaging with China in the financial sector, but China appears to be backing down in the new talks. According to Russian Finance Minister Anton Siluanov, an agreement has not yet been reached on obtaining loans in the Chinese currency, the yuan.

Putin and Xi are long-time allies. But Western sanctions put the close relationship between the two countries to the test. © Dmitry Lovetsky/DPA

The Chinese yuan plays an important role in the Russian economy – and in Putin's path towards independence from the US dollar. “More than 80 percent of trade transactions between Russia and the People’s Republic of China are carried out in rubles and yuan,” Putin said in 2023, according to an official English text of his speech at the annual meeting of the Shanghai Cooperation Organization (SCO). .

Consequences for Putin's economy: Business between Russia and China stops

In a recent report, the Russian Central Bank admitted that it has limited options other than the Chinese yuan for its reserves. According to the Russian Central Bank, the yuan's role as an international currency and its liquidity have increased “significantly” in recent years.

Russian companies that borrow in Chinese yuan are reportedly facing an increase in borrowing costs Bloomberg in March. Borrowing costs for short-term yuan bonds briefly rose to 15.7 percent on March 1 before falling to 4 percent a few days later. Companies are already under pressure due to rising domestic borrowing costs since the central bank chose in February to keep interest rates at 16 percent to combat high inflation. High interest rates have increased debt costs for corporate borrowers by 1.2 trillion rubles. This emerges from data from Russian consulting firm Yakov & Partners.

Sanctions work: Many banks allowed Putin to break the law

It's not just Chinese banks that are feeling pressure from the West in the wake of sanctions. Türkiye, in particular, cut off some of its banking connections at the beginning of the year. Major lenders in the UAE have also begun closing bank accounts of Russian citizens and restricting payment transactions with Russia, the business newspaper reported. Vedomosti Citing anonymous Russian business and government sources.

Russian oil companies are also facing payment delays of several months or even rejection of transactions because some banks from Turkey, China and even the United Arab Emirates fear secondary sanctions. The news agency reported this Reuters Citing eight sources familiar with the circumstances. Banks will require written guarantees from their customers that the transferred funds will not reach a company or person on the US sanctions list.

Penalties and secondary penalties

The United States has used so-called secondary sanctions for decades to give its primary sanctions greater impact. This type of sanctions is intended to prevent individuals abroad from entering or continuing business contacts with targets affected by the initial US sanctions (such as Russia).

Western sanctions against Russia: Putin loses his trading partners

Western secondary sanctions have proven particularly effective in recent weeks. “The USA and Europe are now focusing on secondary sanctions in order to put pressure on these countries and narrow the corridors,” explains Markus Cube, a military economist at the ETH Zurich Military Academy. world.

In addition to China, Russia may lose India as an important trading partner. India is considered one of the most important buyers of Russian crude oil. news agency Reuters According to Indian refiners, there is currently concern about new Western sanctions. In the latest sanctions package, the United States blacklisted Russian shadow fleets.