In a significant move away from the traditional dominance of the US dollar, trade between Russia and China has seen a dramatic shift towards national currencies. During a recent visit to China, Russian Deputy Prime Minister Andrei Belusov announced that an impressive 95% of trade transactions between the two nations were conducted using the Russian ruble and the Chinese yuan in 2023. This figure underscores a growing trend of de-dollarization, particularly in trade relations between countries seeking alternatives to the US dollar.
Further highlighting this shift, Russia’s Minister of Economic Development, Maksim Reshetnikov, stated that for the period spanning January to October of the same year, 68% of Russia’s total trade was settled in the respective national currencies of the trading partners. This expansion of national currency usage isn’t limited to China; Russia has also employed the yuan in trade settlements with a diverse range of countries including Mongolia, the Philippines, Malaysia, the United Arab Emirates, Thailand, Japan, Tajikistan, and Singapore.
The increasing adoption of national currencies in international trade, particularly the move away from the dollar, is not a sudden phenomenon. The discussion around de-dollarizing economies within the Global South has been ongoing for years. However, 2023 appears to be a pivotal year, marking a notable acceleration in this global trend.
The Impact of Sanctions: A Catalyst for De-Dollarization
The urgency for Russia and other nations to reduce reliance on the US dollar has been significantly amplified by the extensive sanctions imposed on Russia. Since the commencement of the “Special Military Operation” in Ukraine in February 2022, Russia has become the target of over 17,000 sanctions, as reported by Russian Foreign Minister Sergei Lavrov.
These sanctions, largely originating from what Russia perceives as the “Global North”—comprising the United States, Canada, the United Kingdom, the European Union, Switzerland, South Korea, Australia, Japan, and select nations like Singapore—represent a historic level of economic pressure. US President Joe Biden himself acknowledged the sanctions were designed for a long-term impact, aiming to surpass any previous measures against a major economy.
The initial wave of sanctions dates back to 2014, following the political upheaval in Ukraine and Crimea’s subsequent reunification with Russia. These earlier measures, coupled with escalating sanctions from 2022 onwards, have fundamentally altered Russia’s economic strategy and trade currency preferences.
“From 2014 to 2022, Russia simultaneously pursued de-dollarization and euroization,” notes Xu Poling, Director of the Department of Russian Economy at the Chinese Academy of Social Sciences. During this period, the European Union emerged as Russia’s primary trading partner, leading to a shift from the US dollar to the euro as the main transaction currency.
However, the intensification of EU sanctions in 2022, which included bans on transactions with the Russian Central Bank and restrictions on euro-denominated banknotes, effectively made the euro, like the dollar, a “toxic” currency for Russian economic agents. This situation further accelerated the need for Russia to pivot away from Western currencies. The Russian Central Bank explicitly stated in its 2022 report that increasing trade agreements in national currencies with “friendly countries” was critical for maintaining and developing foreign trade under these new circumstances.
This geopolitical shift is reflected in trade flows. According to Xu Poling, trade between Russia and Europe plummeted by 70% from 2022, while simultaneously, trade between Russia and Asia surged by 70%. Currently, imports from Asia, predominantly from mainland China and Hong Kong, constitute 40% of Russia’s total imports. Furthermore, a substantial portion of Russia’s sovereign wealth fund (60%) and foreign exchange reserves (40%) are now held in Renminbi (RMB) assets, China’s official currency. In contrast, Russian imports from the EU have dwindled to a mere 2% by September of this year, a stark decrease from 9.5% in February 2022, according to Eurostat.
The Boomerang Effect: Sanctions and the Reassessment of Dollar Dominance
The sanctions imposed on Russia are not only reshaping its trade patterns but also triggering a broader reassessment of the US dollar’s role in global finance. Zhang Xin, Vice Director of the Russian Studies Center of East China Normal University, recalls that serious discussions about de-dollarization began as early as 2014, emphasizing its geopolitical significance, particularly in light of the Iran sanctions.
The weaponization of the dollar through sanctions has raised concerns among many developing nations regarding the security of their assets and financial stability. The situation with Russia has amplified these concerns, prompting countries to seek alternatives to dollar-based transactions.
This shift is evident in recent international trade developments. Notably, OPEC+, led by Saudi Arabia, decided to implement significant oil production cuts in late 2022, despite pressure from the US. Furthermore, in August 2023, India, for the first time, used its national currency, the rupee, to purchase oil from the UAE. Both Saudi Arabia and the UAE are set to join the BRICS+ group in January 2024, further strengthening the bloc of nations exploring alternatives to dollar dominance.
Even within Europe, the reliance on US energy is coming at a premium. Data from Ria Novosti, based on Eurostat figures, indicates that since February 2022, the European Union has been paying, on average, twice as much for US liquefied natural gas compared to pre-conflict prices. Estimates suggest that the EU has spent over 52 billion euros more on US fuel compared to 2021 prices. This economic impact of geopolitical tensions is another factor pushing nations to diversify away from dollar-centric systems.
Record China-Russia Trade: A Testament to De-Dollarization
The burgeoning trade relationship between China and Russia serves as a concrete example of successful de-dollarization in practice. Bilateral trade has surpassed expectations, reaching over US$ 200 billion, a target initially set for 2024, and hitting over $218 billion from January to November 2023, a 26.7% increase year-on-year.
This growth is not just in volume but also in the nature of goods traded. Zhang Xin highlights that China is increasingly exporting advanced manufactured goods to Russia, including hardware, electronics, machinery, heavy trucks, and automobiles – sectors that were not historically dominant in their trade partnership. This shift indicates a deeper and more comprehensive economic relationship, less reliant on traditional commodity exchanges.
Economist Xu Poling points out that this restructuring of global supply chains, while driven by geopolitical factors, comes with significant economic costs and potential long-term disruptions. He estimates that the recovery and rebuilding of secure industrial chains could take five to ten years, impacting global economic growth.
BRICS and the Future of De-Dollarization
The BRICS group of nations is emerging as a key driver in the global de-dollarization movement. President Lula of Brazil has consistently advocated for payment systems based on local currencies within BRICS, aiming to reduce reliance on the US dollar. This initiative is expected to be a key topic at the next BRICS Summit in Kazan in 2024, under Russia’s presidency, where reports on the feasibility of such systems will be presented.
Zhang Xin believes that the combined economic weight of BRICS nations, particularly China, major energy producers, and key developing economies, has the potential to significantly alter the global financial landscape, challenging the “petrodollar” system that has underpinned US dollar dominance since the 1970s.
President Putin, at the BRICS Summit in Johannesburg, explicitly used the term “de-dollarization,” emphasizing the “irreversible process of de-dollarization” within BRICS economic ties, driven by the development of efficient mechanisms for mutual payments and financial control.
While acknowledging that complete de-dollarization is a long-term process, Xu Poling emphasizes that the politicization of the US dollar and its use as a geopolitical tool makes de-dollarization an “inevitable move.” The increasing trade between Russia and China in their national currencies, achieving 95% in 2023, is a clear indicator of this accelerating global trend.
