China won't suffer from yuan-rouble swap

The trade settlements between China and Russia have been characterized by two major features. First, the majority of the trades were settled in dollars. In 2013, only 6.8 percent of the trades between China and Russia were settled in local currencies. Second, the rouble was used much more than yuan in non-dollar settlements. Around 90 percent of all non-dollar settlements were transacted in roubles, and the currency has remained dominant despite the yuan's rising popularity over the past few years.

Due to these factors, Russian companies are reluctant to settle trades in yuan, and their need for yuan can be simply satisfied by banks' trade financing services. In other words, the rouble will remain dominant in bilateral trade settlements, and Russia has no need to activate the swap deal.

However, with the rouble falling sharply and Russia's interest rate rising substantially, one may wonder whether Russia will activate the deal if local companies change their choice of currency in trade settlements.

It's unlikely that Russian companies will see net expenses in yuan even though the rouble's exchange rate has dropped so sharply. In trade between China and Russia, Russian companies are usually the ones to decide which currency to use. Therefore, when the rouble is devalued, Russian export companies will choose yuan, while Russian import companies will choose the rouble. Under such circumstances, Russia will see a net income of yuan and will not activate the swap deal.

With Russia raising its key interest rate to 17 percent and its domestic liquidity drying up, Russian companies may have motive to use the yuan as a cheap way of financing. But this is too risky since the exchange rate is fluctuating. Moreover, whether they can use yuan through the swap deal depends on whether the two governments activate the deal.

Even if Russian companies press their government to activate the deal, the deal will also benefit China because it will help promote a steady development of bilateral trade in the midst of the rouble crisis and it will promote the yuan's influence in bilateral trade, challenging the rouble's dominance of bilateral trade settlements.

In a word, China definitely won't suffer from the yuan-rouble swap deal.

The writer is the executive director of the Institute of World Economics & Politics at the Chinese Academy of Social Sciences (CASS).

This article was written in Chinese and translated by Chen Xia.