What is the "dirty" yuan and why is it becoming an increasingly serious problem for Russia?

BECAUSE of the sanctions introduced by the USA at the beginning of June, it is not possible to trade dollars and euros on the Moscow Stock Exchange. It is still possible to buy currency as cash or from banks, but the market itself is more limited. As Russian citizens save in foreign currencies, it is clear that this brings about a change in the market.

For example, at the beginning of the year, citizens bought the equivalent of about 100 billion dollars. Almost all of the demand reported by the Central Bank in its March report was in dollars and euros. However, banks claim that the sanctions did not cause a sudden demand for foreign money.

Yuan
As the first alternative to the dollar and the euro (but also to other Western currencies), the Chinese yuan was introduced. The Chinese currency is not subject to any restrictions, and Russian banks allow free withdrawal of yuan from a bank account, while restrictions remain for the dollar and euro. Russian banks offer citizens the possibility of deposits in yuan at an annual rate of up to 5%.

In addition, China is Russia's main trading partner, so the yuan is needed. Russian companies issue bonds in Chinese currency every month. Basically, the yuan has become the main foreign currency in Russia. Last year, the yuan itself took second place in the world in trade exchanges through the SWIFT system, but its share is about 20 times smaller than the US dollar, so Russia does not have to use the yuan exclusively in trade with China, but also with some other countries. In addition, the Central Bank is increasing its yuan reserves.
It is not freely convertible
According to economists, this increase in reserves is of questionable sustainability. The reason for this is that the yuan is not considered "freely convertible". What does that mean? There are two yuan in China itself. One onshore (CNY) and one offshore (CNH). CNY is the yuan used within the People's Republic of China, i.e. it is under the control of the Chinese authorities. Traditionally, China has strictly controlled its currency and restricted international financial transactions, allowing settlements in yuan only within mainland China (a kind of monetary mercantilism).

Regulations were gradually relaxed as China grew economically, but in order for the Chinese authorities to maintain control over the currency, two currencies were formed. Put simply, CNY is under strict supervision by the People's Bank of China, while CNH is left to the market. Because the two-currency situation is complex, the movement of money in and out can be expensive and slow in some cases. For example if dollars or euros are brought into China, then it is not a problem. But if you enter China with yuan, there can be problems. Converting to Mainland Yuan requires several steps, and the transaction may end up being canceled.
Sanctions to China
It is precisely this problem of the introduction of yuan into China that Russian companies feel. Payments in yuan purchased inside Russia are increasingly being rejected, causing alarm among trade participants. In addition, the US is preparing to impose sanctions on Chinese banks (so-called secondary sanctions) that help Russia circumvent Western sanctions. In such a scenario, Russian citizens would not be able to withdraw money abroad, even in yuan, and international payments would become even more complicated.

"Dirty" yuan
In such an environment, the term "dirty" yuan was born. "Clean" yuan refers to currency bought abroad (hence, offshore yuan CNH), while "dirty" yuan is that bought inside Russia, either on the stock exchange or in the interbank market. The number of Chinese banks willing to accept money at a higher price in Russia has significantly decreased since the US sanctions in June. The Chinese branch of Russia's VTB Bank also began to face serious problems in transferring yuan to client accounts in China.
Even before, the situation was not very good, that is, VTB Bank used complex methods to fill yuan reserves. Among other things, they used to transfer through local intermediary Chinese banks or the Russian branch of the Bank of China, but these channels are now closed.
Direct transmissions reduced
As a result, direct transfers of yuan from Russia to China, which were previously challenging, have now been reduced from 15% to 5%, according to The Moscow Times. There is also the possibility of paying directly to China in rubles, but not all banks are ready to accept payments in Russian currency. Simply put, even if the clothes do make it to China, their usage is low because there is simply no demand.

On the other hand, banks that are ready to accept rubles tend to raise the price for this type of payment, which again leads to the question of the profitability of such trade exchange.

Third countries and cryptocurrencies
In many cases, transactions with China became possible only through intermediaries in Central Asian countries. In these cases, the yuan does not leave Russia or enter Russia. But even such transactions are fraught with difficulties as countries have their own restrictions on currency transfers.
Also, paying with cryptocurrencies through Hong Kong has become more popular, but even in this case, Russia is forced to use an intermediary, in the form of countries such as Uzbekistan or Kazakhstan. The problem with cross-border payments has become the main problem for Russian business in 2024. The Bank of Russia, which opposed the use of cryptocurrencies before the war, is now promoting the idea of making international payments with their help.
So far, Russia has managed to find ways to circumvent sanctions, but Western countries, primarily the US, have begun to take a much stricter approach in implementing sanctions.

CONCLUSION

Sanctions imposed by Western countries on Russia (as well as Chinese companies) due to the invasion of Ukraine, that is, cooperation with the Russian military industry, leave the public with the impression that they are not producing results, but it is obvious that Russian companies are having more and more problems. As China has become Russia's largest trading partner, the majority of payment transactions take place in the Chinese national currency - therefore exclusively according to Chinese rules.

Clarifications regarding the problems that Russian companies have trading in "dirty" yuan, show that the sanctions related to the ban on trading in dollars and euros put Russia and its economy in a subordinate position when it comes to China and Chinese companies. The problem that Russia has with cross-border payments seems to culminate this year, which makes the Russian economy, but also the state, increasingly dependent on China. China, on the other hand, is taking advantage of the situation and trying to get the most benefit for itself and its company.

Such behavior of China should be a clear message to the authorities of countries in the Western Balkans that China is a friend only in a situation where it can derive maximum benefit for itself from that friendship.