Markets are held hostage to every attack and counterattack in the Gulf, as the threat of a generationally defining energy shock rises with each passing day. A sustained surge in energy prices would, all things being equal, strengthen the ruble and create numerous problems for the Kremlin in the process. Yet the opposite scenario is unfolding. The current narrative is straightforward: a lack of yuan liquidity inside Russia is driving devaluation against the US dollar. Energy revenues took a massive hit in the lead-up to the present crisis, and the Ministry of Finance has suspended the budget rule, meaning there are no excess earnings to park into liquid assets that could serve as a buffer. Russia’s nascent market for sovereign debt denominated in yuan is suffering as well. Yuan now accounts for virtually the entirety of the domestic exchange market.
This odd dynamic—ostensibly rising energy earnings accompanied by a weakening ruble—reflects the peculiar ways in which sanctions and the regime’s wartime economic policies have deformed the Russian economy. Because financial sanctions that, for now, appear to be off the table from any shift in Washington, Russia’s savings and its ability to access foreign currency depend entirely on how much more it can export than it imports. If Russia’s trade relationships were sufficiently diversified, there would be some slack available from whatever remaining liquid assets are held in the National Welfare Fund and from the range of currencies used by major trade partners. But because China has taken such a massive share of consumer and industrial imports—and because the yuan effectively is the foreign exchange market—Russia needs to run a trade surplus with China at all times to avoid precisely the situation it finds itself in right now.
All of this stems from months of interrupted oil trade linked to escalating US sanctions pressure on China’s oil majors, who had been buying Russian crude at a discount. Those majors are now soliciting Russian crude volumes again, potentially offering relief from the current devaluation pressure on the ruble, since oil discounts are narrowing, vanishing, or even flipping into premiums amid the war in the Gulf. But there is a related problem for Moscow’s technocracy. The war is driving a surge in the US dollar’s real value as investors race for cash, even as the People’s Bank of China manages the slow, steady appreciation of the yuan against the US dollar within the yuan-dollar peg. In other words, the real cost of imports from China is rising in tandem with the dollar. Even if the liquidity crunch eases, a structurally strengthening yuan will increase import costs for Russian consumers at the margins, creating additional inflationary pressure.
Exchange-rate instability dovetails with the Ministry of Finance’s dual mandate: to find revenues wherever possible and to engineer indirect means of supporting domestic industry. Consultations continue, but the Ministry is planning to introduce new VAT tax rates on imported goods sold by e-retailers on marketplace platforms. The current working proposal is to start at 7% in 2027, 14% in 2028, and 22% in 2029. Intended to level the competitive playing field between brick-and-mortar retailers and e-retailers, the measure is also a tool for trade management. A huge share of the goods sold on Russian marketplace sites are of Chinese origin, regardless of whether the vendor is actually Chinese. Raising VAT rates will naturally push retailers reselling these imports to increase their prices, creating another inflationary impulse triggered by tax intervention while theoretically making domestic production more competitive through these sales channels.
As the current stress on the ruble demonstrates, administrative interventions that reduce imports by raising prices and costs indirectly help sustain the trade surplus needed to guarantee yuan liquidity. According to the latest data release, the Federal Customs Service collected almost 6 trillion rubles in revenues last year. That would imply taxes on imports provide revenues worth around 2.5% of GDP. But the regime cannot significantly increase revenues by taxing imports further, because doing so destroys demand. It’s a perfect trap. Rather than viewing these various policy efforts as part of a coherent plan for self-sufficiency that is being executed incompetently, they are better understood as reactive improvisations to each new problem created by each prior intervention.
The liquidity crunch spills over into indicators that point to real economic stress. Small businesses and street vendors are pivoting to get customers to pay in cash instead of by credit—never a positive sign for confidence in the financial system. Add to this a collapse in the capacity to invest in the future. A recent survey by the Center for Strategic Research found that 75% of small and medium-sized businesses now lack the profits to invest anything in development. Demand is drying up, pushing businesses to cut corners wherever possible and—for those at the minimum threshold for Mishustin’s tax digitalization system—to dodge taxes. This may also explain the growing preference for cash, especially among those dependent on imports from China.
When so many points of fracture exist—falling investment, falling demand, a shrinking labor force, and no clear sources of growth—concerns about social trust matter increasingly. The scale of recent interruptions to internet access and use provides a useful example. For a regime that made such a massive deal of digitizing services, transactions, and the public’s interface with commerce and power, cutting off the internet without clear reasons upends confidence. As the state calls for more AI and automation, what is the point of investing in the IT infrastructure necessary or of building your life around various technologies that constantly expose you to arbitrary state interventions? Cash is king because you hold it in hand, stuff it under your mattress, and get it out of a bank where it may be stuck because of some incomprehensible announcement.
The yuan liquidity crunch brings home the fragility of the economic status quo. Ukraine’s recent successes at the front cannot be hidden from view. Casualty counts are shooting up, and long-range strikes have finally shattered the sense that—aside from border regions—the war is still far away for most people most of the time. When Sergei Shoigu says that no region is safe from attack, something has changed. The last thing the Kremlin needs is a society returning to cash transactions, emptying bank accounts, and preparing for a tomorrow in which basic institutions no longer function or otherwise preserve their well-being enough to bear the indignities of the wartime economy. While the precise GDP figures may not yet reflect the depth of recession hinted at in January-February, it is undeniable that the Kremlin has run head first into a wall. Every solution only creates more problems that cannot be solved.
