Russia and China Challenge Dollar Domination

The Russian government has recently announced it will issue nearly $1 billion equivalent in state bonds, but denominated not in US dollars as is mostly the case. Rather it will be the first sale of Russian bonds in China’s yuan. While $1 billion may not sound like much when compared with the Peoples’ Bank of China total holdings of US Government debt of more than $1 trillion or to the US Federal debt today of over $20 trillion, it’s significance lies beyond the nominal amount. It’s a test run by both governments of the potential for state financing of infrastructure and other projects independent of dollar risk from such events as US Treasury financial sanctions.

Russian Debt and China Yuan

Since the August 1998 sovereign default triggered by the West, Russian state finances have been prudent to almost a fault. The size of the national government debt is the lowest of any major industrial country, a mere 10.6% of GDP for the current year. This has enabled Russia to withstand the US financial warfare sanctions imposed since 2014, and forced the country to turn elsewhere for their financial stability. That “elsewhere” is increasingly called the Peoples’ Republic of China.

Now the Russian Ministry of Finance is reportedly planning the first sale of Russian debt in the form of bonds denominated in Chinese yuan currency. The size of the first offering, a testing of the market, will be 6 billion yuan or just under $1 billion. The sale is being organized by the state-owned Russian Gazprombank, the Bank of China Ltd., and China’s largest state bank, Industrial & Commercial Bank of China. The move is being accelerated by reports that the US Treasury is examining potential consequences of extending penalties, until now concentrated on Russian oil and gas projects, to include Russian sovereign debt in its sanctions warfare. The new yuan bond will be traded on the Moscow Exchange and will aim to sell to mainland Chinese investors as well as international and Russian borrowers at attractive interest rates.

Western sanctions or threats of sanctions are forcing Russia and China to cooperate more strategically on what is becoming the seed of a genuine alternative to the dollar system. The Russian yuan debt offerings will also give a significant boost to China’s desire to build the yuan as an accepted international currency.

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