Yuan Ruble Currency Swap

We have written about the persistent fall of the ruble. We have also written about China’s attempts at internationalizing the yuan. Now the two issues have met as China helps bail out the falling ruble with a yuan ruble currency swap. Bloomberg comments on the $24 billion swap program.

China is stepping up its role as the lender of last resort to some of the world’s most financially strapped countries.

Chinese officials signaled Saturday that they are willing to expand a $24 billion currency swap program to help Russia weather the worst economic crisis since the 1998 default. China has provided $2.3 billion in funds to Argentina since October as part of a currency swap, and last month it lent $4 billion to Venezuela, whose reserves cover just two years of debt payments.

The International Monetary Fund is typically the lender that bails out failed currencies. The price is typically that the country gets its financial house in order so that it gets out of debt and so that its currency maintains its value. The price the Chinese exact is different, access to raw materials and alliance on global political issues.

Access to Raw Materials

There are products that require very specific and often hard to find raw materials. One of these is the solar power cell. An article in PVTech looks at competition for raw materials, especially from the view of a growing Chinese economy.

No discussion of commodities would be complete without a mention of China – clearly the 800 pound gorilla in the room. Despite the slowdown in the rate of economic growth to just over 7% in 2014 from over 10% per year in recent years, the country is still growing and doing so from a much larger base than before (the World Bank estimates that China’s GDP is US$9.24 trillion).

Effectively, the country is still both the primary producer and consumer of dozens of metals and minerals and is growing more slowly in percentage terms, but still producing and consuming similar amounts of raw materials as she builds out high-tech supply chains and caters to the growing middle class there. This phenomenon must be worrisome to those involved in PV production outside of China as it implies higher raw materials prices in the future (and lower margins), unless technological breakthroughs in how we use metals and minerals in solar are made and commercialized.

The point of the yuan ruble currency swap as well as help that China is offering to Argentina, Venezuela and others is that China wants and needs access to a wide variety of rare earth minerals, oil, natural gas, etc., etc., etc. The price of the yuan ruble swap is not to get the Russian financial house in order but to hold Russia hostage to the Chinese as their lender of last resort.

Sino Soviet Bloc

In the bad old days of the Cold War, Russia and China together were commonly referred to as the Sino Soviet bloc. This was despite battalion sized battles on the Russian frontier with China! Now President Putin of Russia is rapidly burning his bridges with the West and cozying up to China again. Not surprisingly the Russian press sees this as a sign of trust between the former allies. Tass writes:

China’s readiness to back up Russia’s financial system with its national currency is a sure sign of mutual trust and mounting cooperation between the two countries, polled analysts have told TASS.

On Monday, China’s Foreign Minister Wang Yi said China was prepared to support Russia with the yuan and that Russia had the “opportunities and wisdom” for finding out a way of the economic turmoil. The issue in focus is a 150-billion-yuan swap deal between the Bank of Russia and the People’s Bank of China, which allows the central banks to directly buy yuan and ruble in the two currencies, rather than via the US dollar.

If you look at the yuan ruble currency swap as a political move by Russia back to the East instead of a bailout of the ruble it has significant meaning. China has a slowing economy but significant currency reserves. And China has great expectations of being the most powerful nation. Beware Russia of your rich and hungry neighbor who is lending you money!