Western sanctions against Russia following its invasion of Ukraine were intended to cripple its economy. While some predicted a shift away from Western financial systems, the reality is more complex. Despite efforts to diversify, Russia’s economic activities and currency choices continue to highlight the enduring power of the euro and, to a lesser extent, the US dollar in global finance, even when considering the Euros Rouble exchange.
Critics of Western sanctions argued that weaponizing finance would backfire, pushing nations towards alternative currencies and systems. Indeed, Russia’s demand for euro payments for gas to be converted to roubles appeared to signal a move away from Western currencies. However, this action, alongside Russia’s request to India to pay for gas in euros, reveals a crucial point: escaping the orbit of Western currencies is far from straightforward, particularly when examining the euros rouble dynamic. The perceived alternatives lack the depth and liquidity necessary for major economies.
The Euro’s Grip on Russian Trade: More Than Just Roubles
Sanctions have undoubtedly made dollar transactions more difficult for Russia. By targeting major Russian banks like Sberbank and the Russian Central Bank, the US has complicated Russia’s access to the dollar-dominated global financial system. Any dollar-based transaction risks being intercepted by US sanctions due to its reliance on US intermediary banks and settlement systems.
Russia has been aware of these risks for years and has actively promoted the rouble for trade within the Commonwealth of Independent States (CIS). However, when it comes to broader international trade, the rouble has not been the currency of choice. Instead, as Chart 1 demonstrates, there’s been a notable increase in euro usage in Russian trade over recent years. This shift towards the euro occurred even before the recent sanctions, indicating a preference beyond immediate geopolitical pressures.
Chart 1: Currency Invoicing of Russia’s Exports. This chart illustrates the increasing preference for Euros in Russian export invoicing, highlighting the limited adoption of the Rouble.
This trend extends even to trade with China, as shown in Chart 2. Despite a 2019 agreement between Russia and China to increase the use of roubles and renminbi in bilateral trade, the euro has become more prominent. This preference for the euro over the renminbi in Russia-China trade further underscores the limitations of non-Western currency alternatives.
Chart 2: Currency Breakdown in Russia-China Trade. Even with agreements to use domestic currencies, the Euro maintains a strong presence in trade between Russia and China.
The reason for this euro preference lies in the practicalities of currency exchange. As Chart 3 reveals, both rouble and renminbi trading overwhelmingly involve conversions to or from the US dollar. The euro, while more liquid than the rouble or renminbi, still lags far behind the dollar in global foreign exchange markets. Transactions directly between less liquid currencies like the rouble and renminbi are infrequent and often rely on the dollar as an intermediary, adding costs and complexity.
Chart 3: Currency Trading Pairs Globally. The dominance of the US dollar in foreign exchange markets is evident, with both the Rouble and Renminbi heavily reliant on USD pairings.
Rouble Grandstanding and the Euro’s Practical Appeal
In the wake of sanctions, China has attempted to boost rouble-renminbi trading, even allowing the rouble to depreciate against the renminbi to encourage volume. However, despite these efforts, rouble-renminbi trades remain expensive and illiquid. The bid-ask spread for rouble-renminbi trades significantly widened, dwarfing the spreads for dollar-euro conversions, indicating low trading volumes and higher transaction costs. This lack of liquidity makes it difficult to accurately assess the rouble’s true value and hinders its effectiveness in international trade.
Putin’s demand for euro payments for Russian gas to be converted into roubles appears more symbolic than practical. While it might offer a superficial victory, economically, Russia would likely benefit more from direct euro payments. The euro’s relative stability and wider acceptance make it a more advantageous currency for international transactions. This is further evidenced by Russia’s request to India to pay for gas in euros, not roubles or renminbi, highlighting the continued practical reliance on the euro even amidst geopolitical tensions and the euros rouble debate.
Beyond Roubles and Renminbi: The Hurdles to Currency Alternatives
Russia and China have long sought to reduce their dependence on Western currencies, exploring alternatives like cross-border payment systems and central bank digital currencies (CBDCs). However, these initiatives face considerable obstacles. China’s existing cross-border payment system, CIPS, still processes a limited number of transactions and relies on SWIFT, a Belgian-based system. Furthermore, linked CBDCs require a high degree of trust and complex agreements between central banks, including collateral arrangements and crisis liquidity provisions. For weaker economies like Russia, these systems carry macroeconomic risks, potentially leading to exchange rate instability or even “digital currency substitution,” where citizens prefer a digital renminbi over the rouble, eroding monetary sovereignty.
Chart 4: Global Currency Usage in Payments. Despite China’s economic influence, the Renminbi’s share in global payments remains modest compared to the US Dollar and Euro.
The Enduring Allure of Dollars and Euros
The dominance of the US dollar and the euro is not simply a matter of political influence; it is rooted in fundamental economic factors. These currencies benefit from network effects: widespread use makes them more readily accepted and valuable. The US and Eurozone boast deep and liquid markets for safe, dollar and euro-denominated assets, providing investors and central banks secure stores of value. In contrast, the markets for rouble or renminbi-denominated assets are less developed, offering less certainty of liquidity during crises.
The US Federal Reserve’s provision of currency swaps to other central banks during crises, followed by similar actions from the European Central Bank, further solidifies the dollar and euro’s roles as anchors of the global financial system. While China has also established currency swaps, the Russia-China swap agreement has seen limited use, reflecting factors like trade imbalances, sanctions concerns, capital controls, and rouble instability. Ultimately, the size, stability, and openness of Western economies, coupled with a commitment to the rule of law, underpin the perception of dollar and euro assets as safer and more reliable.
Chart 5: Currency Composition of Foreign Exchange Reserves. Russia has reduced its USD holdings but significantly increased Euro reserves, indicating the Euro remains a key reserve currency.
Western Currencies as Preferred Foreign Reserves
Sanctions targeting the Russian central bank’s foreign reserves, largely held in Western central banks, have been particularly effective. Asset freezes impose minimal costs on Western economies while significantly impacting Russia, increasing its need for foreign currency and making retaliatory measures like energy supply cuts more painful. The rouble’s sharp decline and subsequent inflation following the asset freezes demonstrate the impact of these measures.
Anticipating potential US sanctions, Russia had already reduced its dollar holdings in favor of euros, pounds, and renminbi. However, this shift towards euros wasn’t necessarily a miscalculation. It underscores the limited alternatives to Western currencies for nations seeking to build “war chests” of foreign reserves. Even in seeking to diversify away from the dollar, Russia has gravitated towards the euro, further cementing the importance of Western currencies in the global financial landscape and the context of euros rouble dynamics.
Despite geopolitical tensions and the desire for alternatives, the practical realities of global finance continue to favor established Western currencies. Non-Western currencies lack the liquidity, depth, and trust necessary to fully displace the dollar and euro in the near future. Efforts to circumvent Western financial systems entirely will likely create more vulnerabilities than solutions for countries like Russia and China.
Conclusion: The Enduring Power of the Euro and Dollar
While Russia and China may explore ways to reduce their reliance on Western financial systems at the margins, a complete decoupling is impractical and potentially detrimental. The euro and dollar’s dominance is not solely due to political pressure but is underpinned by deep-seated economic advantages: liquidity, stability, and trust.
Sanctions have, paradoxically, reinforced the importance of Western financial systems. Russia’s attempts to navigate sanctions while still relying on euros highlight the euro’s continued relevance. The more Russia seeks to politicize its financial system, the more attractive the stability and reliability of Western currencies become. For the foreseeable future, and when considering the intricacies of euros rouble exchanges, the euro and dollar will remain central pillars of the global financial order.
Zach Meyers is a senior research fellow at the Centre for European Reform.
