Over the past ten years, Russia has pushed to de-dollarise its economy. It has reduced the use of the US dollar in cross-border transactions, reduced the amount of dollars it holds and created a new national electronic payments system. These moves are a hedge against the risks of American sanctions on Russia’s economy.
Meanwhile, China is motivated to de-dollarise its international trade and investments because of US-China tensions over the past years. To Beijing, it seems necessary to prepare in advance should the US impose sanctions over human rights and territory issues. The Russia-Ukraine war gives a glimpse into the possible sanctions and impacts China will have to face if there is a conflict with Taiwan.
Thus both China and Russia have a common interest in de-dollarising their economies to get around US sanctions. On top of that, these two powerful economies recently said in a joint statement that “friendship between the two States has no limits” and “there are no ‘forbidden’ areas of cooperation”.
Would the Russia-China alliance pose a challenge to the dollar’s dominance and thereby rewrite global rules and reshape the world order? Do the two countries have the ability to do that?
To Russia, it has no choice but to de-dollarise its economy as there is a long history of US sanctions on Russia.
The dominant strategy for Russia is de-dollarisation in the short and long run
“Dominant strategy” is a term in game theory referring to the optimal strategy for a player, no matter how that player’s rivals may play. The dominant strategy for Russia is de-dollarisation.
To Russia, it has no choice but to de-dollarise its economy as there is a long history of US sanctions on Russia. Whenever US interests are threatened by Russia, economic sanctions will usually be used to deter Russian activities and achieve desired results.
Russia is not standing by and doing nothing. As of 2020, it cut the proportion of its dollar-denominated reserves by about half compared to 2018 (from more than 40% to 22%) and in June last year, it announced that it would completely remove dollar-denominated assets from its sovereign wealth fund.
Russia also tried to get around using the dollar to conduct its international transactions with its trading partners. In the 4th quarter of 2020, only 10% of its exports to other BRICS countries (Brazil, India, China, and South Africa) used US dollars as payments, which was down from 95% in 2013. Furthermore, Russia created a new national electronic payments system, Mir, in 2015 and its financial messaging system, SPFS, to reduce its reliance on a dollar-centred payments infrastructure.
The above efforts have indeed helped Russia to minimise the impact of the very recent economic sanctions imposed by the US and its allies. However, it has to be acknowledged that this is still a dollar-dominated world. One country’s effort will not be sufficient in reshaping the world order. The leadership position of the dollar in the financial and business world is unchanged, at least in the short run.
Still, Russia’s determination to de-dollarise encourages other countries (i.e., the countries under US sanctions and the countries who hope to promote their currencies) to follow in its footsteps.
... China will not view de-dollarisation as a priority, at least not in the short run. However, deteriorating US-China relations are pushing China to line up with Russia to accelerate de-dollarisation.
De-dollarisation not a priority for China now but necessary in the long run
Dollar-denominated cross-border transactions still play an important role in China’s economic activities. The US is also the biggest export market for China. In light of this, China will not view de-dollarisation as a priority, at least not in the short run. However, deteriorating US-China relations are pushing China to line up with Russia to accelerate de-dollarisation. The economic sanctions that Russia faces today may be what China will face tomorrow, given many unresolved issues such as human rights, territorial issues, etc. China will want to take precautions to ensure the stability of its economy and financial market in the long term.
On one hand, China has tried to diversify its reserves to reduce its exposure to the US dollar since 2019. On the other hand, China trimmed more than US$21 billion off its holding of US Treasury bonds by July 2021 — its lowest record since 2010. The decisions stemmed from the consideration of financial stability as well as China-US ties.
At the same time, it has been promoting cross-border transactions invoiced in RMB and introduced its own clearing and settlement services system, the Cross-Border Interbank Payment System (CIPS). It has also signed local currency swap agreements with many countries participating in its Belt and Road projects, including Russia. According to a report from the People’s Bank of China, cross-border use of the RMB, including payments and receipts, soared 44.3% year on year to 28.39 trillion RMB (about US$4.4 trillion) in 2020.
The alliance between China and Russia worries the West
The common interest that China, Russia and other countries have in de-dollarisation has incentivised them to work together to gradually weaken the monopoly power of the dollar. By the end of 2020, more than 83% Russian exports to China were invoiced in euros. In the recent 30-year contract signed with Russia, China agreed to use euros in gas sales.
To enhance bilateral ties with China, Russia has initiated a series of moves including increasing the share of RMB in Russia’s foreign exchange reserves, signing a treaty to increase the use of their local currencies in cross-border transactions, and helping to broaden a RMB-based financial infrastructure, etc.
There is an old saying: “If the lips are gone, the teeth will be cold.” Hence, China will largely maintain neutrality, given the consideration of US power and its friendship with Russia.
In addition, China has its digital currency and global payment network. Some analysts think the sanctions to exclude Russia from the SWIFT financial messaging system could offer new development opportunities for the Chinese system. Meanwhile, other countries may have to think about whether they need to join the Chinese payment network to offset the risk of holding and using the greenback.
If countries seek more autonomy from the US, they will have to strengthen their linkages with China, which will indirectly weaken the power of the dollar in the world and reshape the global order over time.
Apparently, China does not want to be involved in US sanctions over Russia’s war as that will do more harm than good to its economy. Beijing has always made stability a priority ahead of other economic goals. It will not provide any explicit help or support to Russia’s war at the cost of its economic stability. However, international trade between China and Russia does offset the impact of Western sanctions on Russia to some extent.
China may not want to see Russia fail in the war as the alliance with Russia can help balance the relations between China and the rest of the world. There is an old saying: “If the lips are gone, the teeth will be cold.” Hence, China will largely maintain neutrality, given the consideration of US power and its friendship with Russia.
The US sanctions have not resulted in a ceasefire. Instead, the sanctions have exacerbated an energy crisis and pushed up global inflation, as well as impeded global economic recovery from Covid-19. How long the US’s European allies can endure the soaring energy prices and how they resolve the problems of Ukrainian refugees are still uncertain. But one thing is for sure: some countries have started to think of turning away from the dollar. If countries seek more autonomy from the US, they will have to strengthen their linkages with China, which will indirectly weaken the power of the dollar in the world and reshape the global order over time.