Although the U.S. and Europe excluded Russia’s energy trade from restrictions to prevent further rises in the international crude oil market, this approach has failed by current market conditions.
On March 2, Brent crude closed at nearly $105 per barrel, the highest price since August 2014. Refiners, traders, and oil giants are concerned that they may violate certain sanctions, and global buyers are looking elsewhere for needed crude supplies.
Russia is the world’s second-largest exporter of crude oil, behind Saudi Arabia, exporting about 5 million barrels of crude oil per day to the global market, as well as 2 million to 3 million barrels of refined products.
This has also meant an impact on the opportunities for European and American companies to pay for Russian exports, including oil, gas, metal products, etc. Similarly, it has led to a sharp spike in the cost of obtaining borrowing financing in the U.S. and European financial markets in dollars and euros, and market participants are increasingly concerned that oil prices will continue to rise.
Against these backdrops, the market expects Russia to increase its oil supplies to China. According to a TASS report on March 1, the Russian oil pipeline carrier is planning to increase supplies to China via the East Siberian-Pacific Oil Pipeline (ESPO) to 2.48 million tons in March from 2.22 million tons in February, with an expected increase in settlement of transactions in yuan, while some Russian oil companies are also turning to unrestricted financing from Rosbank, UniCredit and Raiffeisen and other unrestricted banks.
In fact, the settlement of transactions by Russian and Chinese companies without SWIFT is not a big issue at all, as Russia and China started to de-dollarize years ago, and direct local currency settlement in RMB and rubles is already a regular business.
Data show that in the first half of 2021 alone, RMB settlement already accounted for 28% of China’s export business to Russia, compared to 2% eight years ago, and during this period, the RMB accounted for 13.1% of the Russian central bank’s foreign exchange reserves, compared to 0.1% in June 2017, while the dollar’s share fell from 46.3% to 16.4%, which means that the RMB is increasingly popular among Russians.
This is because both Chinese and Russian institutions are stepping up their efforts to reduce their reliance on the US dollar for this purpose, while developing their respective cross-border payment systems, and the use of SWIFT by Europe and the US to restrict several Russian banks is a landmark event that will accelerate the process of de-dollarization, which will be very beneficial for the internationalization of the RMB in the long run.
At the same time, Russia still sees the foreign business community as a potential partner and is open to it, the head of the equity analysis department of Russian Finam Finance told Sputnik on March 2, adding that Chinese investors will not leave the Russian market. Cooperation and investments between Russian and Chinese companies have been increasing in recent years, while, including exports, the two countries are actively promoting efforts to de-dollarize.
Immediately after that, there were already Chinese buyers in Russia involved in a number of projects such as bean and grain cultivation and agro-food processing. For example, just a week ago, the Chinese General Customs Administration has allowed the import of grain from the entire territory of Russia, which is extremely important for Russian producers and exporters, so that in 2022-2023, Russian agribusiness will start exporting grain to the Chinese market on a large scale.
In this regard, the Minister of Far Eastern Development said that Chinese companies have invested more than $2.5 billion in the Russian Far East, accounting for 6% of the total investment in the region, which will further facilitate the process of de-dollarization of the Russian Federation and China in the trade and economic sphere and increase the probability of using the local currency of both sides, due to the increasing role of China as a market for Russian exports and a source of investments.
According to the latest data, according to the Central Bank of Russia, several Russian banks have been connected to the Chinese cross-border interbank payment system CIPS, which will facilitate trade settlement between Russia and China. At the same time, a new settlement mechanism between Russian and Chinese companies is now being established, which provides Russian businesses doing business in China with the prerequisite to receive or settle local currency directly, as well as to facilitate the entry of more Russian goods, including oil, gas and agricultural products, into the Chinese market in terms of currency settlement and to provide greater scope for Russian and Chinese businesses to generate income. Source