The relationship between Russia and China continues to strengthen. Chinese President Xi Jinping is currently on a state visit to Russia, where several announcements have been made solidifying the economic cooperation between the two countries going forward. 

Perhaps one of the most impactful is that of Putin’s endorsement of the Chinese yuan as the currency of choice for international trade.

We are in favour of using the Chinese yuan for settlements between Russia and the countries of Asia, Africa, and Latin America. I am confident that these forms of settlement in yuan will develop between Russian partners and their counterparts in third countries

Vladimir Putin

Why is Russia ditching the dollar?

Despite a joint statement from the two presidents that the economic agreements, which number 14 in total, were “not confrontational in nature…and not directed against (other) countries”, the move is widely viewed as a continued effort by Putin to ditch the dollar, which has been the world’s reserve currency since World War II. 

Russia has been hampered by sanctions from the West since it invaded Ukraine in February 2022. One of the most impactful of these sanctions has been its banks being shut out of SWIFT, the international payment channel. 

This has made it significantly more challenging to conduct payments in dollar or euro. As a result, it has been forced to look towards alternatives. 

Some analysts fear the Russian economy is already overdependent on the yuan. Even before the war in Ukraine, Russia had been making plans to reduce its reliance on the dollar. Now, they have been forced to accelerate those efforts. 

The proportion of foreign currency in Russian banks fell to 15% in the third quarter of 2022. Yuan payments in the Russian market have increased 32%, while dollar and euro payments have fallen 52% and 24% respectively. Even on the Russian stock market, the yuan’s share of trading has jumped from 3% to 33%. 

Will dollar always be the reserve currency?

It follows growing clamours around the world that the dominance of the dollar may be waning, even if it still retains a chokehold on the global reserve status. 

The IMF released a paper in 2022 assessing the “stealth erosion of the US dollar”. It showed a currency which still retains an absolutely dominant hold on the top spot, but also presented reason to believe it was trending downward. 

Central banks were allocating more to nontraditional currencies, while the dollar’s share of global trade was also decreasing. 

Of course, the world has changed a lot since then. The paper was published in March 2022. Since then, inflation has spiralled upwards and the world has transitioned into a tight monetary regime, with one of the fastest rate hiking cycles in memory. 

With inflation rampant, the dollar has actually strengthened against other currencies, as investors have flocked to it given its safe haven properties and status as the global reserve currency – albeit with a pullback in recent months as inflation has softened. 

Nonetheless, the dollar strengthening against the other major currencies does not necessarily mean its place as the reserve currency is doing the same. 

Russia and China’s efforts will continue to try and erode that status. Thus far, the dollar has remained king, but it is undoubtedly fair to say that the threat from the Chinese yuan has grown substantially in recent years. 

Its ties with Russia, and Russia’s affirmation that it will continue to push the yuan for trade, is just the latest reminder of that. 

The post Russia embraces Chinese yuan as attack on US dollar continues appeared first on Invezz.



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Dan Ashmore, CFA
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