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Western sanctions push Russia, China closer; hurt dollar

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Russian President Vladimir Putin, left, met with Chinese President Xi Jinping in China in May, where the two signed a major natural gas deal.   © Reuters

TOKYO -- By forcing Russia to conduct more business in the yuan and other Asian currencies, the U.S. may be speeding up the end of the petrodollar and giving China more prominence on the world stage.

     As the West tightens financial sanctions against Russia over the conflict in Ukraine, Russian businesses are reducing their exposure to the dollar to minimize the damage from still tougher punishments. Many of these businesses have turned to the Hong Kong dollar as an alternative to the greenback.

Hong Kong harbor

Russian mobile phone carrier MegaFon said it will convert 40% of its dollar- and euro-denominated cash reserves into Hong Kong dollars.

     Major nonferrous metal producer Norilsk Nickel has also decided to shift its U.S. dollar funds into the Hong Kong dollar.

     The Hong Kong dollar is an ideal safe haven for Russian companies looking to park their cash. Because the currency is pegged to the greenback, the foreign-exchange risk of holding Hong Kong dollars is no different from owning the U.S. currency. But because Hong Kong is part of China, funds held in the Hong Kong dollar are unlikely to be affected, even if the U.S. and Europe introduce tougher sanctions against Russia, such as asset freeze.

     The Russian economy has operated smoothly within the dollar reserve-currency system for years. Natural resources, which make up the vast majority of Russia's exports, are mostly paid for in dollars.

Driven from the West

But the U.S. decision to level financial sanctions against Russia over its intervention in Ukraine has made it difficult for Russian businesses to transact using dollars.

     The ability of Russian oil giant Rosneft and state-owned banks to raise funds in the U.S. and European capital markets is now limited because they have been targeted under Western sanctions. The country's defense industry is also having a hard time settling accounts in dollars.

     U.S. and European financial institutions are acting cautiously toward Russia as a whole, not just companies targeted by the sanctions, said Natalia Orlova, chief economist at Alfa-Bank, a Russian private bank.

     To guard against the possibility of both an asset freeze and the growing difficulty of settling trades in the greenback, big Russian corporations have been inserting a clause into trade contracts since May. The language states payments can be made in the Chinese yuan or other currencies, if necessary.

     "Because the U.S. has persuaded Europe to join in financial sanctions, Russia has no choice but to shift toward Asia financially," said a Russian government official.

     In addition to procuring funds from China, Russia is exploring financial cooperation with countries and regions that are less susceptible to U.S. pressure and have good relations with China, according to the official, such as Hong Kong and Malaysia.

     Alpha-Bank estimates Russian businesses' total external debt at $650 billion. Of that, $310 billion is held by state-owned banks and enterprises. Some $80 billion of this debt will mature by 2015.

     With roughly $470 billion in foreign reserves at its disposal, Russia's central bank will have no problem meeting the country's foreign-currency needs for the time being. But some Russian companies are taking steps to cut their exposure to the dollar, girding themselves for the possibility of long-term sanctions.

Yuan shift

According to Russian news reports, Norilsk Nickel and Gazprom Neft, a big oil company, are negotiating with China to settle their exports to that country in yuan, rather than dollars. In addition, Gazprom, a natural gas company, is considering issuing yuan-denominated bonds.

     Russia has up to now been leery of being pulled into China's sphere of economic influence, but the U.S. and European sanctions have narrowed its options. At a summit between Russian President Vladimir Putin and his Chinese counterpart, Xi Jinping, in May, Russia signed a major natural gas export contract with China, signaling a shift away from its previous caution toward Chinese investment and loans in the natural resources sector.

     "We will resolutely resist U.S. pressure," a Russian official vowed, adding, "Ending our reliance on the dollar is the biggest challenge." China is the only other place to turn, realistically, to escape the dollar's orbit. "We have some concerns about depending on China, but Russo-Chinese relations have no immediate problems," the official said.

     The greenback has remained the world's reserve currency, even after its link to gold was severed, because it is still the settlement currency for the global energy trade. But the U.S.-led sanctions may push China, a large energy user, and Russia, a big exporter to do business in yuan instead. China may end up the unintended beneficiary of U.S. action against Russia.

Yasuo Awai in Hong Kong contributed to this article.

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