Russia loses $2.2 billion through yuan investments

The Bank of Russia continues to lose foreign currency reserves as a result of its operations on the international currency market, reports.

After the unsuccessful conversion of euros into dollars in 2017, which led to a loss of $4.5 billion, the Central Bank of Russia decided to invest a record amount in the Chinese yuan, and once again made losses in the billions on exchange rate differences.

By the start of April, the proportion of the Chinese currency in Russia’s foreign currency reserves reached a record of 5% at $23 billion, the regulator reported on Monday.

The Central Bank began buying yuans in the middle of last year: in the second and third quarters it invested $3.9 billion, and in the fourth quarter it bought an additional $8 billion. It executed the largest part of the conversion deal - $11 billion – between January and March, when the yuan-dollar exchange rate was close to a 2-year record, between 6.2 and 6.3 yuan per dollar.

Russia’s Central Bank bet on China, but the market moved in the opposite direction: due to the China-US trade war, capital began to flow out of China, devaluing the currency rapidly. In the second quarter it lost 5.2% of its value, reaching 6.62 yuan per dollar, and by the end of the third quarter it had fallen by another 3.6% to 6.87.

As a result, the Bank of Russia’s yuan investments depreciated by 9.4%, equating to a loss of $2.16 billion.

Although investment into the yuan is being done as part of the road to foreign economic isolation and the de-dollarization of the economy driven by Russian President Vladimir Putin, in monetary terms it will likely cause Russia significant losses, according to predictions by JPMorgan and Deutsche Bank.

The Chinese government’s unwillingness to reach a compromise with the Trump administration will lead to a new round of trade war, in which all Chinese exports to the US will be placed under tariffs, and the yuan will fall to 7.19 to the dollar by the end of next year’s third quarter, JPM predicts.

Deutsche Bank is expecting devaluation to 7.4 yuan per dollar over the next year, which would cost Russia’s Central Bank another 8% of its investment, i.e. $1.8 billion

  Russia, ruble, China, Central Bank of Russia, Deutsche Bank