Falling oil and gas revenues due to Western sanctions have widened Russia's budget deficit and the Kremlin is busy flogging off some of the Chinese yuan reserves it has built up to fill the gap.
Russia had a budget deficit of a 3.3 trillion ruble ($47 billion, €45 billion), or about 2.3% of GDP, in 2022.
A fall in the export price of Russian oil below $50 (€45,84) per barrel (159 liters) could increase Russia’s budget deficit by another 2.5 trillion ruble, forcing the Kremlin to increase yuan sales further, according to the analysts of news agency Bloomberg.
Russia’s budget for 2023 is based on an average annual oil price of $70 per barrel and the EU ban on Russian oil and its $60 per barrel price cap is costing the Kremlin over $170 million a day, said the Finish think tank, Centre for Research on Energy and Clean Air, which estimates that Russia's crude oil exports fell 12% in December.
Nikolai Korzhenevsky, founder of Russian market analyst SberIndex, says the figures are an indication Russia's state finances are deteriorating. "They could become critical this year if spending cannot be maintained without damaging macroeconomic equilibrium," he told Russian-affairs weekly newsletter The Bell.
Mark N. Katz, a professor at George Mason University thinks Putin's use of the yuan to balance Moscow's budget may increase Russia dependency on China.
"But unless Beijing is willing to make use of its economic leverage and threaten to sanction Russia [over Ukraine], it is doubtful whether this economic dependence gives Beijing much opportunity to influence Putin's policies. Not yet, anyway," he told DW.
Time is money
A Bloomberg report, citing internal analysts and experts from the Citigroup bank, says Russia could be able to wage war in Ukraine for up to three years provided there is no big fall in the Kremlin's oil income.
The Bloomberg analysts estimate Russia's yuan reserves may run out in 2023 if the average price of Russian oil drops to $25 a barrel or lower, while those of Citigroup see Russia depleting its yuan reserves this year at $35. An oil price above $60 could allow the government to start adding to its yuan reserves, they conclude.
Russia needed Urals to average $104 to balance the books last year, and the break-even will decline to $90 in 2023 only if the government avoids spending increases.
Timothy Ash, a senior sovereign strategist at Bluebay Asset Management in London, thinks Russia's biggest problem for the sale of its oil are the "discounts of 30-40%" against normal market prices it has to give to customers. "Lower gas prices meanwhile mean that in 2023 Russia may lose around $50 billion in income from gas exports," he wrote in an analysis for Washinton-based think tank, Center for European Policy Analysis (CEPA).
Building up reserves
Putin is also simultaneously building up the yuan as Russia's main reserve currency after Washington and Brussels slapped sanctions on Russia, freezing $300 billion of the Russian central bank’s foreign exchange reserves.
As of December, Russia had over $571 billion in international reserves. Before the war it had $630.5 billion and $105 billion in the yuan.
Russian Finance Minister Anton Siluanov said that of all the "friendly" currencies, the Chinese yuan has the best "reserve characteristics" and "sufficient liquidity."
But experts believe Russia could be painting itself into a fiscal corner as the war in Ukraine drags on.
Eric Hontz of CIPE — a think tank affiliated with the US Chamber of Commerce — thinks the Russians are trying to show markets the ruble is still convertible into another major world currency.
As regards the effects on China he thinks Russia's yuan sales "run directly counter" to Chinese efforts to get the yuan more widely accepted for the settlement of international transactions, particularly in the commodities markets.
Economies moving closer together
The Russian economy has moved closer to China in the wake of the Ukraine war. In particular, Moscow's energy plans call for an increase in exports to China.
Bilateral trade between China and Russia in 2022 rose 34.3% to a record high of 1.28 trillion yuan ($189,5 billion). Chinese and Russian leaders have jointly set a goal of bilateral trade volume to rise to $200 billion by 2024.
But Russian economist Stanislav Mitrakhovych pointed to three key risks Russia could face by increasing reliance on the yuan.
First of all, the Russian financial system is ill-equipped and largely unprepared for the challenges of relying more on the yuan, he told DW. Secondly, the yuan's price is regulated by the Chinese state, which could leave Russia as a "hostage to Chinese interests." And thirdly, the yuan remains tied to other global currencies, meaning the Chinese central bank could easily devalue the yuan for domestic purposes.
Albrecht Rothacher says the Russo-Chinese relationship is much more important to the Russians than to the Chinese. While China is Russia's main trading partner, Russia is tenth for China, the EU diplomat and East Asia specialist told DW.
"Chinese and Russian energy ambitions and needs never match. The match is 10:1 economically and demographically," he said and added that Russia "understandably does not like the junior role as a quasi-colonial supplier."
