For more than a decade, China and Russia have sought to reduce their use of the US dollar, or “de-dollarise” their economies, to shield their economies from US sanctions, reduce exposure to the effects of US economic and monetary policy, and assert global economic leadership. Over time, if de-dollarisation efforts gain traction, there could be implications for the US economy, US sanctions, and US global economic leadership.
The dollar has served as the world’s dominant reserve currency since World War II. A reserve currency is a currency held by central banks in significant quantities. It is also widely used in international trade and investment transactions. Today, the dollar remains the primary currency used in cross-border transactions, held by central banks in reserves, and traded in foreign exchange markets. The role of the dollar reflects global confidence in the US Federal Reserve (Fed) as an institution and the US economy and financial markets more generally.
The dominance of the US dollar in cross-border transactions allows the United States unique visibility and levers of influence through policy measures such as financial sanctions that impede access to the US financial system or the use of the US dollar in international trade. Sanctions, imposed for foreign policy or national security objectives, restrict access to the US payments and financial system, which is generally needed to process dollar transactions.
De-dollarisation emerged as a priority for Russia in 2014 in response to the imposition of Western sanctions following the annexation of Crimea that limited the ability of state firms and banks to raise financing in Western markets. China also began seeing value in this initiative after the onset of the US-China trade war in 2018 and the use of punitive financial measures by the US.
Moscow found an early partner in Beijing to support its de-dollarisation effort as part of their expanding economic cooperation. Chinese Premier Li Keqiang signed 38 agreements on a visit to Moscow in 2014 deepening cooperation on energy and establishing a three-year currency swap deal worth 150 billion yuan (about $24.5 billion). This deal was renewed for another three years in 2017.
Russia and China shifted further away from using the dollar in bilateral trade in 2018 following the US imposition of heavy tariffs on Chinese goods and the onset of the US-China trade war. While Moscow had previously spearheaded the de-dollarisation initiative, Beijing quickly modelled Russia’s strategy when it perceived its own risk of punitive US financial measures. This made way for a 2019 agreement to replace the dollar with national currencies in international settlements between them. Such financial coordination helped Russia reduce its reliance on the greenback in trade. While 80 percent of Russia’s total exports were denominated in US dollars in 2013, only a little over half of its total exports today are settled in dollars. Most of the decrease was absorbed by its trade with China.
China’s current de-dollarisation efforts prioritise PBOC’s development of a digital currency. This initiative involves developing a domestic payment system that could be used globally and advances China’s efforts to create alternatives to US-controlled global economic, financial, trade, and technology networks. The effort aligns with China’s buildout of its national security economic authorities, including new export controls and sanctions laws. The Chinese government is handling domestic deployment with a focus on retail transactions as well as cross-border trade with Hong Kong, Thailand and the United Arab Emirates. Relatedly, China is piloting the joint use of foreign exchange and RMB in companies’ cash management and as cross-border financing for technology firms in designated zones.
China is already using its digital currency to propose global financial rules. At the Bank for International Settlements Innovation Summit in March 2021, China submitted a Global Sovereign Digital Currency Governance proposal that shares its views for standards on cross-border digital transactions, risk supervision, and data. At the event, the director of PBOC’s Digital Currency Research Institute said that PBOC aims to become the first major central bank to issue a sovereign digital currency to propel RMB internationalisation and reduce dependence on the dollar. China’s payments network could give China a greater understanding and control of certain global financial flows.
Russia has focused de-dollarisation efforts by reducing its holdings of dollars. Russia’s central bank cut the share of its reserves denominated in dollars by more than half between 2013 and 2020. In July 2021, the Russian finance minister announced plans to completely remove from the country’s sovereign wealth fund dollar-denominated assets, which accounted for about one-third of the $186 billion fund. It has reduced its share of trade conducted in dollars. The government of Russia has concluded various discussions and agreements with several countries—including China, India, Turkey, and other members of the Eurasian Economic Union (Armenia, Belarus, Kazakhstan, and Kyrgyzstan)—to prioritise the use of national currencies in bilateral trade. These initiatives have shifted the currency composition of Russia’s trade.
Mere after Russia launched the military operation in Ukraine, Washington has manoeuvred a raft of sanctions against Moscow, removing Russian banks from the international financial messaging system SWIFT, freezing any Russian assets “touching the US financial system,” and threatening to “crush Russia’s economy.” In response, Russia has developed its financial transfer system—the System for Transfer of Financial Messages (SPFS)—as an alternative to SWIFT and required “unfriendly countries” to pay for gas supplies in rubles.
The BRICS—which until recently has been made up of Brazil, Russia, India, China, and South Africa—is a forum that allows countries outside of Western developed economies to forge alliances on economic issues. As it gets larger, its influence and economic importance grow. In its recent meeting, President Putin announced that Russia, alongside China and other BRICS nations, was getting ready to launch a new global reserve currency made up of a basket of BRICS currencies. If successful, such a reserve currency would be a direct threat to the currently dominant US dollar.
Iran and Argentina are jumping on the bandwagon because they sense an opportunity to build an alternative alliance to Western-led globalisation. In their current form, the BRICS make up around 31.5 percent of world GDP when adjusted on a purchasing power parity basis. With Iran and Argentina added, this rises to 33 percent of the world GDP. This is a huge potential trade bloc, and 33 percent of global GDP is certainly enough to justify a reserve currency.
But beyond this, the potential for synergies between the countries is enormous. Taken together, the expanded BRICS countries currently produce around 26 percent of global oil output and 50 percent of iron ore production used to make steel. They produce around 40 percent of global corn production and 46 percent of global wheat production. If these were all traded in the new reserve currency, it would instantly become a cornerstone of the world economy.
Meanwhile, the US dollar is already sagging. At the beginning of June, the IMF released a report showing that the US dollar today makes up 59 percent of global reserves—a far cry from the 70 percent it made up in 1999. The report noted that central bank reserve managers were actively shifting their portfolios away from dollars and into non-traditional currencies.
After Russia and China, the third BRICS member country namely India has opted to Internationalise its rupee for trade and curb its reliance on USD. Although Pakistan, a non-BRICS member but a key ally of Russia and China, has not been an enthusiastic advocate for such a de-dollarisation partnership but has been exploring a rupee-rouble trade arrangement with Russia. Pakistan must seriously think about diversifying its foreign exchange reserves, increasing investments in other currencies, and switching to settlements in its own national and other international currencies between partner countries.
Jai Kumar Dhirani
The writer is a political analyst. He can be reached at jai.dhirani@yahoo.com. He tweets @thakurjaid.
