Russian President Vladimir Putin has made public his plans to promote the use of the Chinese yuan as a currency of payment in Russia’s trade with Asia, Africa and America. The news has generated a stir because it supposedly opens the door to dethrone the dollar as the international reserve currency. However, the announcement may not end up having much significance in the end.
First of all, it must be taken into account that using a currency as a means of payment does not necessarily mean that it will be used as a reserve currency. The payment currency is simply the one that the seller accepts in exchange for a good or service, but this does not imply that he will keep that currency within his treasury balance. For example, if I had a shop in Spain and a foreigner wanted to buy from me in sterling, I could agree to charge him in sterling and then immediately change it to euros. Therefore, the fact that the yuan becomes a currency of payment for trade between some (or many) countries does not mean that those countries will want to keep such yuan in their portfolio.
In order for the yuan to become an international reserve currency – one in which the various economic agents in the various countries wanted to keep in their investment portfolios–, China would have to carry out important reforms in its financial market, such as lifting the current capital controls allowing its own citizens as well as foreigners to buy and sell yuan without restrictions. This does not seem likely in the short or medium term, as it would mean allowing foreigners to acquire as many Chinese assets as they wish.
Not only that, in order for China to supply an international reserve currency, the country would need to be willing to run external deficits (since the only way for foreigners to increase their yuan reserves is by exporting to China more than they import from it), which in turn would limit the ability of the Communist Party of China to plan the economy (For example, if Chinese citizens prefer to buy cars outside of China than in China, the domestic automobile industry would be severely hampered.)
Ultimately, even if Putin and other political leaders promote yuan trade, the yuan is unlikely to become a relevant international reserve currency in the global financial landscape as long as China does not lift its internal capital controls and accept the possibility of having to run persistent external deficits.