As the year winds down, a Gordian knot tying Russia, oil prices and China together is receiving a great deal of attention. Let's see if we can unravel some of the confusing twists and turns.
We turn first to China's offer of assistance to Russia. The idea that Russia could activate its CNY150 bln (~$24 bln) currency swap line with China is capturing the imagination of many.
Could China be challenging the IMF as several media reports suggest? Hardly. It can only be a challenge if there the IMF was a viable alternative. To contrary, it does not appear the IMF is an alternative to Russia. The sanctions would likely mean that any formal request to the IMF would be rejected.
China has also recently come to the assistance of two other economic pariahs, Argentina, and Venezuela. The sums appear modest (~$2.3 bln and ~$4 bln) the terms and conditions unknown. However, the overall point remains valid. China is not competing with the IMF because the IMF does not appear to want that business.
Nor is the China-Russia three-year swap line a very useful assistance tool for Russia under present circumstances. What will the CNY150 bln, or more do for Russia? Does it have yuan-denominated debt that is maturing? Does it buy many goods from China that it could use the yuan instead of hard currencies? It can sell the yuan and buy dollars or euros, but then it has a currency mismatch.
Under a swap agreement, Russia would be obligated to return the CNY150 bln no matter how many roubles it costs to secure. If it were to activate the swap today, it would be paying almost 8.8 roubles per yuan. At the end of H1 14, there a rouble could buy 5.4 yuan.
Does the possibility of operationalizing the swap line reaffirm the significance of China's swap lines as a parallel financial architecture to the the dollar? Probably not. If a swap line was not in place, China quickly establish a loan facility. Better for Russia than a swap line or loan would be for China to fund infrastructure projects, such as gas pipeline and railway projects in the east, and perhaps a deeper port in Crimea.
