WEAPONIZATION OF FINANCE: Russia's is turning to the Chinese yuan

Russian institutions, energy companies, and banks are increasingly switching over from the dollar to the Chinese yuan, according the Moscow Times.

“Two state energy companies, gas producer Gazprom and its oil arm Gazprom Neft, said they would use more Chinese currency in trade, while Russia’s largest bank, Sberbank, has also promoted the use of the yuan.

“The Russian Central Bank said it was working to create a new funding instrument in yuan, and the Finance Ministry said it was considering issuing debt in the currency,” writes the Moscow Times’ Peter Hobson.

Gazprom Neft announced that it began settling shipments of oil to China in yuan. And previously, the head of Gazprom, Alexey Miller, stated in a TV interview that the company was negotiating with China to use yuan and rubles for gas deliveries via a planned pipeline in Western Siberia.

“Gazprom Neft’s swift embrace of the yuan was likely spurred by sanctions, not profits,” Alexei Devyatov, chief economist at UralSib Capital told the Moscow Times.

Additionally, “Western banks work slower, with more restrictions, and it becomes simpler to move to the currency in which trade is being done,” said Vladimir Pantyushin, senior strategist at investment bank Sberbank CIB, told the Moscow Times.

In other words, Russia is looking to diversify away from the Western financial system after repeatedly being targeted by US sanctions.

The US-imposed sanctions are part of Washington’s larger strategic geopolitical plan called “the weaponization of finance,” which Ian Bremmer defined as the “systematic use of carrots (access to capital markets) and sticks (varied types of sanctions) as tools of coercive diplomacy.”

Basically, the US imposes sanctions (or other coercive economic measures) on “rogue states” (aka states that are acting contrary to US interests), which should then force that state to change its behaviour if it wishes to have the sanctions lifted or to have access to US capital markets again.

Vladimir Putin ObamaREUTERS/Pablo Martinez Monsivais/PoolRussian President Vladimir Putin (C) looks back at U.S. President Barack Obama (L) as they arrive with Chinese President Xi Jinping (R) at an Asia-Pacific Economic Cooperation (APEC) Summit plenary session.

However, the “weaponization of finance” strategy has glaring drawbacks — including this possibility that targeted countries like Russia can and will increasingly diversify away from the dollar.

Russian companies and banks switching to the yuan isn’t the first example of this. Earlier this year, Russia’s Ministry for the Development of the Fast East announced that Russian businesses doing trade through North Korea’s Foreign Trade Bank can make payments in rubles.

“This way, North Korea and Russia don’t need to rely on the dollar,” one person familiar with the matter told Business Insider. “All they have to do is stick with the ruble. They’re increasing their economic ties.”

And outside for the Russo-sphere, there are already existing examples of this including the Asia Infrastructure Investment Bank, the BRICS bank, and the Silk Route Maritime and Overland intitiatives.

Obama xi putinREUTERS/Kim Kyung-HoonU.S. President Barack Obama (L-R), China’s President Xi Jinping and Russia’s President Vladimir Putin during a family photo shoot at the International Convention Center at Yanqi Lake in Beijing, November 11, 2014.

All that being said, the yuan’s not going to fully replace the dollar anytime soon.

Devyatov told the Moscow Times that the yuan is a less convenient currency as it lack’s the dollar’s convertibility.

“It will have caused certain losses,” he added.

Furthermore, “it could take decades for the yuan to circulate on the scale of the euro, and even longer to challenge the dollar, which has the advantage of scale, said Sberbank CIB’s Pantyushin.”

“It could rival the euro, but I doubt it on the dollar.”

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