Russia Should Start Buying CNY to Replenish FX Reserves

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Russia is expected to start buying Chinese yuan to replenish its foreign exchange reserves as early as May 2023, according to Economics. It would be the first time that Russia would replenish its foreign exchange reserves since it invaded Ukraine. The move indicates that Western sanctions and a G7-imposed price cap on Russian crude are not enough to reduce Russia’s energy revenues. Something is loading.

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Russia is expected to start buying foreign currency as early as this month, marking the first time Moscow has replenished the country’s reserves since it invaded Ukraine in February 2022.

Moscow is expected to rake in about $200 million in Chinese yuan each month, Economics reported on Tuesday. The yuan is one of the few key currencies available to Russia after Western sanctions cut the country off from the dollar-denominated global financial system.

Russia stopped buying foreign currency at the end of January 2022 due to market volatility, shortly before invading Ukraine. After its invasion of Ukraine, Russia was hit with broad Western sanctions and it suspended its monetary intervention program. In June, a US-backed global task force blocked more than $300 billion in assets held by Russia’s central bank.

Russia resumed its monetary intervention program in January 2023, starting with the yuan. Russia’s impending purchase of the Chinese currency would mark a reversal of its sales of yuan from its reserves to cover its budget deficit – which reached $29 billion in the first quarter of 2023. The country has reduced its sales of yuan since February , according to Economics.

“The volumes of currency purchases will be small initially, but highly symbolic as they will show that the country instead of drawing on reserves is building them up,” Russian economist Alexander Isakov told Economics.

Moscow’s resumption of foreign exchange reserve interventions would indicate that Western sanctions and a G7-imposed price cap on Russian crude are not enough to curb Russia’s energy revenues.

How has Russia maintained its energy revenues despite sanctions?

Russia, an energy giant, has managed to maintain its energy revenues even in the face of Western sanctions.

In large part, the Kremlin accomplished this by forcing oil producers like Gazprom and Lukoil to pay more taxes, reported.

Russia has also been able to counter Western restrictions by redirecting oil exports to alternative markets such as China and India. The two Asian countries have bought so much Russian crude that Russia’s maritime crude exports in the first quarter surpassed levels of the same period last year, according to Kpler, a commodity analysis firm.

In April, the International Energy Agency said Moscow’s revenue was down about 43% from a year ago. But oil prices have been supported since early April due to OPEC and Russian production cuts. On the demand side, China’s economic reopening after nearly three years of intermittent COVID-19 shutdowns should also support prices.

U.S. crude oil futures are down 5.8% so far this year at around $76 a barrel, but are up nearly 14% from this year’s low of around 67 dollars per barrel. International Brent oil futures are down 7.6% so far this year at around $79.50 a barrel, but are up 9% from this year’s low.

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