'Challenge to Dollar Hegemony' China Quadruples Yuan Loans to Russia

The Chinese government has significantly increased yuan-denominated loans to Russian banks following the Ukraine war. This is interpreted as part of China's strategy to undermine the dominant position of the dollar as the key currency, aiming to erode the dollar hegemony that supports the global financial order.

According to major foreign media on the 3rd (local time), China's four major state-owned banks?Bank of China, Industrial and Commercial Bank of China, China Construction Bank, and Agricultural Bank of China?have increased their loans to Russian banks from $2.2 billion to $9.7 billion (approximately 13 trillion won) over the past 14 months until March this year, a roughly fourfold (340%) increase.

They have taken advantage of the gap created as foreign banks withdrew from Russian operations in line with Western financial and economic sanctions against Russia following the invasion of Ukraine. Earlier, the major U.S. bank Citigroup quickly withdrew its local operations in Russia after Western sanctions began following the Ukraine crisis in February last year. Besides Citigroup, Austrian Raiffeisen and Italian UniCredit, which had been operating in Russia, are also considering withdrawal plans.

The increase in exposure by Chinese state-owned banks to Russian banks is part of the Chinese government's strategy to counter dollar hegemony. Professor Andriy Onoprienko of Kyiv National Economic University said, "The increase in loans by Chinese banks to Russian banks and credit institutions reflects a move to replace dollar or euro loans with yuan loans."

[Image source=Reuters Yonhap News]

China has been striving to expand the use of the yuan in global financial transactions amid intensifying strategic competition between the U.S. and China. With the Ukraine war as a turning point, the economic ties between China and Russia have tightened, and along with increased trade, the proportion of yuan payments in Russia's trade settlements has also significantly expanded.

According to the Russian Central Bank, the trade volume between China and Russia reached a record high of $185 billion (approximately 244.5 trillion won) last year, and the share of yuan payments in Russian trade settlements soared to 16%. This is remarkable growth compared to the near absence (less than 1%) of yuan payments before the Ukraine war. During the same period, the share of dollar payments fell from over 60% to below 50%.

Following Western sanctions imposed after the Ukraine war, Russia's financial system has tightened, causing severe fiscal difficulties, while its ability to raise funds externally has further weakened. As Russian state-owned banks targeted by Western sanctions struggle to dispose of their foreign subsidiaries, Russia is retaliating by obstructing the sale of local assets by foreign banks withdrawing from the country.

On the 1st, Deputy Finance Minister Aleksey Moiseyev reaffirmed the existing policy that foreign banks in Russia will not be permitted to sell their local assets unless the situation regarding the disposal of foreign subsidiaries of Russian state-owned banks targeted by Western sanctions improves.

This content was produced with the assistance of AI translation services.