Russia's central bank and lenders tell each other to resolve the country's yuan supply squeeze

• Russian banks are urging the country's central bank to boost yuan liquidity amid shortages.
• But Russia's central bank is advising lenders to limit yuan-denominated loans.
• The Russian central bank said currency swaps are a short-term, not a long-term solution to yuan supply.

Russia's central bank and lenders are asking each other to preserve the country's stash of Chinese yuan.

Last Thursday, Russian banks complained that they've run out of the Chinese yuan and called on the Central Bank of Russia to increase liquidity through currency swaps.

But Russia's central bank is passing the buck back to the country's banks.

In a report published on Friday, Russia's central bank advised lenders to limit the issuance of yuan-denominated loans.

The central bank is a primary source of yuan liquidity that it provides via daily sales and one-day swaps of the currency.

"Part of the growth in yuan lending was due to the replacement of loans in 'toxic' currencies, but 41% of the increase came from new foreign currency loans," said the Russian central bank in the report, referring to the currencies of countries that have imposed sanctions against the country.

It added that currency swap operations can only serve as a short-term mechanism to stabilize the market, but they aren't permanent funding tools.

The banks called for increased central bank currency swaps because they needed to use the mechanism to cover their foreign currency lending.

But yuan liquidity is so tight that Sberbank's CEO German Gref said last Thursday that his bank cannot lend in the yuan, because it has "nothing" to cover tight foreign currency positions with, per Reuters. Sberbank is Russia's largest bank.

Russian exporters can also provide liquidity through currency sales, but many Chinese banks are refusing to process payment transactions for Russian companies due to fears of US secondary sanctions.

Chinese lenders are also avoiding currency trading in Russia for the same reason.

The difficulties surrounding yuan liquidity in Russia highlight increasingly challenging trading conditions for the country as the West steps up sanctions.

But Russia and its trade partners are trying to find ways to get around the payments issue.

Dmitry Birichevsky, head of the economic cooperation department of the Russian Foreign Ministry, told Russian TV that the country and its partners are discussing how to link up their bank messaging systems, TASS state news agency reported on Friday.

"Combining these systems or deciding on the basis on which [system] we will work is the most sensitive, painful issue, because this is part of the country's financial sovereignty," Birichevsky said.