The recovery of trade between China and Russia emphasizes the need for continued growth in financial collaboration between the two powers. Bilateral trade rebounded to US$69.5 billion in 2016, after sliding 27% in 2015 to $64.2 billion from 2014’s US$95.3 billion.

China’s top financiers have been reaching out to their Russian counterparts at recent international meetings. Burdened by US and EU sanctions, Russia is increasingly relying on the yuan as an international trade settlement currency. In 2016, China-Russia cross-border yuan transactions saw 27.7% year-on-year growth to 30.46 billion yuan, or 6.41% of total bilateral trade volume. In March 2017, Russian aluminum giant Rusal issued its first Panda Bond tranche of 1 billion yuan. In the same month, the Industrial and Commercial Bank of China officially began operating as a yuan clearing bank in Moscow, further raising the importance of the yuan in bilateral trade and investment.

It is useful to examine China’s commercial interests with Russia at two levels—national and provincial.

Nationally, China is in some respects a beneficiary of the US and EU sanctions against Russia. Although China-Russia trade took a gut-punch in 2015, Russia is now more dependent on China economically than before. Cut off from its traditional sources of financing in the west, Russia had to pivot east. In 2015, Russia made the yuan a reserve currency. The country is now a market for the internationalized Chinese yuan, important for cross-border commerce. Therefore, China’s key national financial interest is in augmenting the role of the yuan in bilateral trade.

Northeastern China’s Heilongjiang province is the locomotive in cross-border trade with Russia, which represents 65.3% of the province’s total import-export trade. In the first four months of 2017, Heilongjiang’s bilateral trade with Russia reached 25.02 billion yuan, a 45.8% increase year-on-year. In 2016, Heilongjiang’s total cross-border yuan transactions with Russia saw a 43.4% year-on-year rise to 7.76 billion yuan, or 25.5% of the national total. Chinese and Russian banks signed cross-border financing agreements totaling 33.5 billion yuan and established a 10 billion yuan fund targeting bilateral trade and infrastructure upgrade.

Heilongjiang bankers are hoping for wider financial cooperation to help boost trade volume. Provincial interests include broadening existing local currency settlement agreements to cover correspondent banks operating in medium and small Russian towns, assisting Russia in establishing yuan cash transaction pilot programs, having more Russian ATM and POS terminals accept China UnionPay, and expanding contacts with banks in all of Eastern Siberia and the Russian Far East.

Russia has expressed interest in further financial cooperation with China. However, the Russian government is conflicted. Russia welcomes the yuan as a source of financing to reduce its dependency on the US dollar. It hopes to boost exports to China and attract Chinese investment for infrastructure projects. But the Kremlin remains wary that greater financial openness will make the Russian Far East overly economically dependent on China.   

Despite the enthusiasm, Chinese financiers also have concerns. First of all, the scale of financial exchanges limits future prospects. China invests $1 billion in Russia annually—one hundred times more than yearly inbound Russian investment. In comparison, China’s 2016 direct investment in the US was US$45.6 billion. Second, the Russian financial system is fragile. Bank assets are concentrated in a few large and medium banks, while the rest have weak risk resistance capacity, low credit ratings, and below minimum Basel III capital adequacy ratios. Third, there is no financial guaranty insurance available to protect Chinese investments in Russia. Fourth, yuan usage is relatively low and the local currency settlement mechanism is far from mature. Last, but not least, the Russian ruble is a high-risk currency. In 2014, the ruble devalued 143%. And in 2016 it was rated the world’s worst performing major currency. The outlook for the ruble remains bearish.

While China and Russia are doing what they can to make the Russian market a more welcoming place, such as establishing a yuan clearing bank in Moscow, there are too many uncontrollable variables in Russia. Although Chinese financiers are interested in expanding cooperation with Russia, we must also remain aware that these risk factors will continue to be a source of unease.