Russia’s Pledge to Ditch the Dollar Is Fast Becoming a Reality

US dollar now used to settle just 45 percent of exports to EU and China, and just one third of imports

Unfortunately the yuan labors under capital controls and isn’t completely convertible so euro rather than yuan is the bigger winner — China truly needs to unchain the yuan, the sooner the better

Russia is acting on a pledge by President Vladimir Putin to shrink the role of dollar in international trade as tensions sour between Washington and Moscow.

The shift is part of a strategy to “de-dollarize” the Russian economy and lower its vulnerability to the ongoing threat of U.S. sanctions. But while the central bank was able to quickly dump half of its dollar holdings last year, progress in trade has been slow due to ingrained use of the greenback for many transactions.

The share of euros in Russian exports increased for a fourth straight quarter at the expense of the U.S. currency, according to central bank data. The common currency has almost overtaken the dollar in trade with the European Union and China and trade in rubles with India surged.

The dollar’s share in import transactions remained unchanged at about a third. [Which doesn’t sound high at all.]

“There’s been a strong incentive to change, not just for Russia but for its trading partners too,” said Dmitry Dolgin, an economist at ING Bank in Moscow. “The European Union is also now facing trade pressure from the U.S.” pushing them to try to reduce dependence on the dollar, he said.

The euro came close to replacing the dollar as the currency of choice for Russian exports to the European Union, with its share climbing to 42% in the first quarter from 32% a year earlier.

Russia still relies on the dollar for more than half of its $687.5 billion annual trade, though less than 5% of those deals are with the U.S. Part of Russia’s motivation to shift is that companies suffer delays on as much as a third of international payments in dollars because Western companies have to check with the U.S. whether the transactions are allowed, Russian Finance Minister Anton Siluanov said in December.

The euro’s share also increased in Russia’s $108 billion annual trade with China, jumping to more than a third of export settlements in the first quarter from almost nothing at the start of 2018. This shift, which covers commodity sales and big state contracts, has been accelerated by the development of payment infrastructure at the central bank and other lenders, according to Sofya Donets, an economist at Renaissance Capital in Moscow.

Trade in yuan is difficult because of capital restrictions that limit foreigners’ access to Chinese assets, Dmitry Timofeev, who heads the Finance Ministry’s sanctions department, told the RBC newspaper.

“The yuan isn’t completely convertible, which means it can’t play a significant role in world trade,” Timofeev said.

Result of Russia no longer accepting dollars for its arms exports

The most dramatic shift is visible in Russia’s $11 billion trade with India. The ruble accounted for three quarters of total settlement in exports between the two emerging markets after they agreed on a new payment method through their national currencies for multi-billion-dollar defense deals.

“The trend is likely to continue because the infrastructure for transactions in alternative currencies is improving,” Renaissance Capital’s Donets said. “Russia won’t be able to give up using the dollar completely though, especially for trade of oil.”

Source: Bloomberg

  1. […] Pledge to Ditch the Dollar Is Fast Becoming a Reality by Andrey Biryukov for Check Point […]

  2. JustPassingThrough says

    “Capital control represents any measure taken by a government, or other regulatory bodies to limit the flow of foreign capital in and
    out of the domestic economy. These controls include taxes, legislation, volume
    restrictions, and market-based forces. Capital controls can affect many
    asset classes such as equities, bonds, and foreign exchange trades.”

    Every country has capital controls of one sort or another. It is just one element in money policy. What happens if the flow of foreign currency is blocked? See recent exampes with the $$.

  3. thomas malthaus says

    I’m under the impression Russia hasn’t entirely divested it US Treasury holdings. The reason being is that nearly $40 billion of what remains is being used as collateral for deals involving gold purchases.

    I might add I don’t believe the numbers this author has asserted. I have reason to believe de-dollarization is happening considerably faster than most believe from both the Russian, Chinese, and European standpoint.

    German investments are being diverted to Russia and considerably more transactions of European origin are performed in rubles or euros.

    Any Russian dollar transactions now tend toward South American countries that are on “friendly” terms with Washington and precious metal related, so as not to stimulate the American economy.

    Some people might term them “sanctions.”

    1. Marko Marjanović says

      Yea I think the US Treasuries dumping was overstated. A chunk of that was moved to the Caymans rather than sold.

  4. John C Carleton says

    Think you can hurry that up?

    Sooner the fiat Not federal, No reserves and Not a bank counterfeit currency finishes dying, sooner the cowardly, illusional, cognitive dissonance infected American sheep will have to pull their heads out of their rear trap doors and look at DC for what it really is.

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