Photo: FellowNekocat – Freepik.com
Friendship ends when it comes to money – even in a supposedly “borderless partnership” like that between Russia and China. Since the outbreak of the war in Ukraine, this partnership has intensified further, as Russia has been increasingly cut off from the Western financial system and the US dollar due to international sanctions. But despite the closer economic cooperation, it is clear that this friendship has clear limits.
Deadlock in Yuan loans: Russia and its negotiations with China
Russia has been negotiating with China for nearly a decade over the possibility of borrowing in yuan. The talks were initially put on hold in 2017, but after Russia’s attack on Ukraine and the resulting increased financial needs of Moscow, negotiations resumed in 2022. Despite intensive efforts, these talks have so far failed to produce any concrete results.
Russian Deputy Finance Minister Ivan Chebeskov reported at the Moscow Financial Forum that cooperation has reached an impasse. The main reason for this is the lack of agreement on a “deposit bridge” that would allow Russia to borrow Chinese currency on acceptable terms. This bridge would more closely link the financial markets of both countries and make it easier for investors in China and Russia to access their respective national currencies.
The question of yuan loans was apparently also Part of the talks between Chinese Prime Minister Li Qiang and the Russian leadership, which took place in Moscow at the end of August. Despite the close economic relations, China has maintained its cautious stance. Instead of direct loans in yuan, China only allows Russia to issue so-called “panda bonds” – bonds that can only be traded on the Chinese domestic market. Transferring the money abroad requires special permits, which Beijing has so far refused to grant. This reticence reflects China’s cautious strategy of protecting its own economic stability and avoiding international sanctions.
Economic risks: China slows down loans to Russia
A key reason for China’s reluctance is economic considerations. Chinese banks must carefully assess the risk of lending to Russia, as the country’s economic instability and weak financial infrastructure pose significant risks for lenders. The volatility of the ruble-yuan exchange rate is particularly problematic. If the ruble were to lose value against the yuan, the risk to China increases that Russia could have difficulty repaying the loans. This could lead to defaults and put Chinese banks in financial difficulty.
At the same time, China is under international pressure to maintain its neutral stance in the Ukraine conflict. Loans in yuan could be viewed by Western countries as covert support for Russia, which could lead to sanctions against Chinese banks and companies.
Current developments show that despite the close economic relations between Russia and China, geopolitical realities and economic risks are testing the supposedly “borderless” partnership. Beijing prefers not to take unnecessary risks by refusing to lend generously to Russia. Instead, China is paying more attention to its own economic interests – in line with the saying: “the shirt is closer than the pants.” At the same time, Russia is stepping up its search for new lenders, suggesting that Moscow is coming under increasing financial pressure.
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