Russian Dividends for Sakhalin Oil Project Paid in Chinese Yuan

The Lede: Russian entities related to the oil and gas development projects in Sakhalin Island have paid their dividends in Chinese yuan due to Western sanctions

What We Know:

  • Chinese yuan were used to make recent dividend payments by Russian entities to Japanese trading companies with stakes in the Sakhalin 1 and 2 oil and gas development projects according to Nikkei Asia. Gazprombank, a subsidiary of the state oil and gas company Gazprom, is believed to be the handler of the transactions related to the project.
  • Japanese stakes in the project are handled through the Sakhalin Oil and Gas Development Co., which holds a 30% interest in Sakhalin 1, as well as Mitsui & Co. with a 12.5% stake in Sakhalin 2 and Mitsubishi Corp with a 10% stake.

The Background: Originally, the dividends for the Sakhalin 1 and 2 oil and gas development projects were paid out in dollar transfers about twice a year through a Singapore-based bank account. With the onset of Western sanctions that barred Russia from the dollar settlement network, financial institutions have become reluctant to deal with dollar transactions involving Russia. While U.S. and European partners withdrew from the Sakhalin projects, the Japanese companies continued to hold their stakes. Last year, Russia established new companies to manage its stakes in the Sakhalin projects located around the island in the country’s far east. Those entities created a new remittance route to pay dividends and claimed that they would be changing the payment method, though they did not specify an alternative currency.

Likely Outcomes:

  • As Western sanctions on the dollar settlement network and other segments of the global economy continue, countries seeking to circumvent currency sanctions may increasingly turn to use alternatives, including the Chinese yuan. These include countries that either lean in favor of China or those that proceed on a more neutral path in Beijing’s rivalry with the West. Other currencies that Russia has been looking into include the UAE’s dirham and India’s rupee. Russia’s dramatic pivot away from U.S. dollars to the increasing use of the Chinese yuan could accelerate and even diversify into other currencies.
  • Aside from Russia, Central Asian and South Asian countries have signaled an increased willingness to strengthen cooperation with China in the near future, while Southeast Asian countries have taken a more neutral stance. With particular instances of energy transactions already being settled in the Chinese yuan and transactions through China specifically intended to skirt Western sanctions, these trends could accelerate if complications in processing international transactions in the U.S. dollar continue or worsen for countries not immediately aligned with the U.S. and its policies.
  • The global monetary landscape could trend toward a multi-polar currency environment with some countries preferring the U.S. dollar, others preferring the Chinese yuan, and many that have a more balanced currency approach to international transactions and reserve holdings. In this context of a more currency-diverse world, the governments of the dominant currency-issuing leaders could implement policies that either encourage or compel business transactions in their respective currencies.

Good Reads:

Russia Pays Sakhalin Dividends In Yuan (Nikkei)