The Russian economy took an unprecedented beating in 2014, largely due to its adventurism into the Ukraine and its annexation of the Crimean peninsula. Western sanctions, spearheaded by US and European efforts, were swiftly imposed upon Russia as punishment for its aggressive posturing. Massive capital flight and a rapid devaluation of the rouble sent shockwaves through the Russian finance sector, prompting the Russian central bank to intervene in the currency markets. In tandem with monetary policy intervention, the Russians signed an important agreement with the Chinese (August 2014) to halt the further depreciation of the rouble on the international currency markets. The Russians are shifting away from their reliance on Western countries, in favour of trade with Bric countries (Brazil, China, India & South Africa).
The Russian/Chinese Currency Swap Deal
With Russia effectively removed from the global credit markets, it turned to its staunchest ally – China. The forex currency swap was expressly designed to stabilize the rouble and improve liquidity in Russia’s finance sector. The 3-year yuan/rouble swap is estimated at over $24 billion, and both countries will be able to purchase one another’s currencies amongst themselves – without going to international markets to trade forex. Leaders from Russia and China (Medvedev and Li Keqiang) ratified the deal and agreed on further measures such as energy sharing and financial cooperation. But the underlying motivation for the currency-swap deal is to dramatically reduce reliance on the US dollar for international trading purposes.
Strong Forex Support from China
Russian Prime Minister Medvedev stressed the importance of expanding the usage of national currencies for trading purposes. Presently, these types of trades account for just 7% of turnover. The use of local currencies is likely to expedite trade between the countries, with a target of $100 billion by 2015 and $200 billion by 2020. The Chinese Import Export Bank has agreed to assist deeply indebted Russian banks with easier access to capital. The Exim bank has already established a credit line valued at $2 billion for the Russian state bank VTB. Various other agreements have been signed with the Russian Agricultural Bank and the Vnesheconombank. The agreements allow Russia to import all manner of products from China, including agricultural produce and equipment. Additionally, the Russians will be cooperating with the Chinese to expand the construction of pipelines into mainland China.
Far Reaching Consequences for the Russian Rouble and Chinese Yuan
There are multiple similar currency agreements in the works between Russia, China and other countries too. The FETS (Foreign Exchange Trade System) will be cooperating with New Zealand (NZD) and Malaysia (ringgit) to initiate similar currency swaps. For its part, China has been working hard on establishing bilateral currency swaps for over 5 years. Among the many countries it currently has agreements with are South Korea, Hong Kong, Indonesia, Brazil and Switzerland. Both Russia and China have been seeking ways of reducing their reliance on the greenback in international transactions. China presently holds an estimated $4 trillion (32%) of its forex reserves in US bonds. This makes China particularly vulnerable to exchange-rate fluctuations. According to information gleaned from the International Reserves of the Russian Federation, Russia is holding $373,658 million in foreign exchange reserves (30/11/2014). This is substantially lower than $474,950 million one year ago (30/11/2013). These funds are highly liquid and readily available to the Russian Federation and the Bank of Russia.
About the author: Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes informative essays for the globally renowned spread betting and CFD trading provider, InterTrader.com