Macroscope | How sanctions on Russia could push countries to diversify foreign reserves, leading to increased yuan demand
- Western sanctions cutting Moscow off from its foreign reserves give China a greater incentive to move away from the US dollar and euro, and may push other countries to follow suit
- Beijing may also be tempted to buy discounted Russian commodities as prices surge elsewhere
With regard to reserve currencies, it’s necessary to look at how things stood before Russia’s invasion of Ukraine. Data from the International Monetary Fund’s Currency Composition of Official Exchange Reserves, published in December, shows that the US dollar, euro, Japanese yen, British pound and the Chinese yuan are the five major reserve currencies held by central banks around the world.
The dollar dominates, with 59.1 per cent of world allocated reserves, and the euro behind on 20.5 per cent. The yen, pound and yuan then account for 5.8, 4.8 and 2.7 per cent respectively.
It might seem odd that the yuan only such a small amount of global allocated reserves, given China’s economic heft. However, in large part that is a reflection both of the fact that the depth and liquidity of the US Treasury market remains unequalled, and that the bulk of global trade continues to be invoiced in currencies other than the renminbi.
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How international sanctions imposed since Ukraine invasion are hitting Russia
Indeed, analysis by Reuters of the composition of Russian central bank reserves as of mid-2021 showed that 32.3 per cent were held in euros, 21.7 per cent in gold, 16.4 per cent in US dollars, 13.1 per cent in yuan and 6.5 per cent in pounds.