Russia and China: Partners in Dedollarization

‘Dedollarization 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,’ write authors of a report “Russia and China: Partners in Dedollarization” at “The Atlantic Council”.

As the Winter Olympics-2022 commenced in Beijing, President Putin visited his Chinese counterpart and the two released a joint statement endorsing Russia’s position on NATO expansion. With tensions escalating along Ukraine’s borders, a potential Sino-Russian security alignment is worrying Western policymakers.

However, those concerned about military cooperation should be careful to not overlook China’s increasing convergence of interests with Russia on another front – finance and dedollarization. Moscow has since made progress in reducing its reliance on the dollar.

Moscow found an early partner in Beijing to support its dedollarization 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 dedollarization initiative, Beijing quickly modeled Russia’s strategy when it perceived its own risk to 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% 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.

Apart from dedollarizing bilateral trade with China, Russia has begun replacing its dollar reserves with yuans and euros. Between 2013 and 2020, the Russian central bank halved its dollar-denominated reserves. In 2021, it revealed plans to completely ditch all dollar assets from its Sovereign Wealth Fund and increase holdings in euros, yuan, and gold instead, thus acquiring a quarter of the world’s yuan reserves.

Even if Russia and China were to significantly reduce their reliance on the dollar, new currencies will present a new set of challenges. Moving forward, dedollarization efforts will face two additional challenges.

First, the euro unseated the dollar to become the dominant currency in bilateral trade. While using the euro decreases Russia’s exposure to US sanctions, it does not shield the Russian economy from EU sanctions. Currently, the EU imposes 150 sanctions on entities and individuals in Russia and has declared its intent to impose more if Russia continues its special military operation in Ukraine.

Second. Dedollarization will not automatically sanction-proof the economy. Even if Russia dedollarizes its trade with China and replaces dollar reserves with other currencies, it will find it difficult to sanction-proof its economy – its overarching objective…

…Of course, the authors of The Atlantic Council’s report do not like this situation at all. However, the process has begun, and this process of de-dollarization is gaining momentum.

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