National Bank of Ukraine to hold Yuan

Oh dear. The IMF is getting in a tizzy because the National Bank of Ukraine and National Bank of China have come to an agreement on Ukraine holding the Yuan as part of its reserve currency.

According to Kommersant Ukrainy newspaper, an NBU official has stated “We will only hold about $2.5 billion in Yuan so far (about 7% of reserves as of the start of November) but it will definitely be there.

Even though China doesn’t especially need the hryivna it is interested in the expansion of the zone of influence of its currency to other countries whereas we are interested in differentiating our reserves. We will be the 12th country to have swaps with China.”

It was also stated that whilst China was happy to carry out all bilateral trade in Yuan/Hryivna exchanges, the NBU, for now at least, will only carry out 33% that way.

Currently the NBU reserves are approximately 45% US$, 34% Euro and 4.6% gold. The remainder you have to assume is in regional currencies such as the Ruble although that is a guess based upon local requirements.

There has also been talk via the Prime Minister of Ukraine, that Russia and Ukraine may well agree for gas to be paid for in Rubles and not US$. Russia and China long ago dumped the US$ in favour of bilateral currency exchange for trade between the two nations.

This is naturally an attraction to the Yuan in current climates, not just because of Chinese growing economic dominance, but also the sheer amount of gold held by China, which it continues to acquire. The Yuan could very well become the first currency to return to anything like the gold standard in the years ahead and thus, for those with access to it, it would become something of a safe haven.

So why is the IMF having something of a girly hissy fit? Well firstly Ukraine is still borrowing, or seeking to borrow, from the IMF and is doing so to insure that is can repay its creditors. Changing 7% (and more as time goes on you have to suspect) into a currency that is not that easy to exchange into currency your creditors are expecting, contractually, to be repaid in may well put additional pressure on the non-Yuan reserves held.

A fair point and one that seems quite obvious.

Secondly though, one has to suspect the IMF is concerned about the obviously planned and controlled expansion of the Yuan into national currency reserves of selected nations. The Chinese authorities are not subjected to short term 5 year political cycles and have a tendency to plan their strategies over a much longer term knowing they are not likely to be ousted from power.

The considered march to influence amongst chosen nations over a long period of time will undoubtedly be done with the idea of gaining better seats at the IMF, WB and other financial tables.

Why is Ukraine a chosen nation? Expect the Chinese in the next few years to start buying metal producers, mines and other commodity producers in Ukraine.

Consider the human headcount and where global growth is coming from relating to the Shanghai Cooperation Organisation and the members and official observers in this organisation. Consider the volume of natural resources Ukraine sits upon tapped and as yet untapped. Consider its geographical position between the EU and Eurasia but also only a few hours from North Africa on a very slow boat. Consider it is widely believed to have the most fertile soil in Europe for agriculture. Consider it is already jointly involved in R&D with Ukraine in several spheres as well as energy exploration agreements. Consider Chinese consulates appearing in major cities of Ukraine (Odessa now has one despite a Chinese population no larger than the British population in Odessa).

All food for thought eh?