For decades international trade has been done in Dollars – but are Russia and China threatening to break up this hegemony and shift the global power balance East?
Ever since the end of World War 2, international business has been conducted in one main currency – the US Dollar. This has been the foundation upon which the United States has built its position as world superpower and has enabled it to wield tremendous soft power and influence in every corner of the globe. Fareed Zakaria in the Washington Post describes the Dollar as an “unrivalled economic and political muscle”, allowing them apply sanctions on countries unilaterally, shutting them out of most of the world economy. As well as that, when Washington spends freely, it can be certain that its debt will be bought up by the rest of the world.
“The dollar is America’s superpower…
Unrivalled economic and political muscle”
Sanctions placed upon Russia in the aftermath of their invasion of Ukraine are of an unprecedented scale – over $300 billion of international assets frozen and moves to exclude its main bank from international markets. They were cut off from using SWIFT, the international banking transfer system based on the US Dollar. Thus, Russia had few options for international trade and a dwindling number of partners. As Russia is barred from being able to settle trade in Dollars an opportunity has been provided for China to progress their long held desire for international adoption of the Renminbi (Yuan).
This cooperation itself is not new, Russia and China have had significant connections since the beginning of the cold war, as they were two communist powerhouses opposing the Western democracies. However, their partnership really picked up pace after the fall of the Soviet Union as Russia was dwelling in the depths of economic despair, forcing them into much greater international co-operation. Meanwhile, China was experiencing rapid economic growth, with its GDP year-on-year growth over 10% for the whole of the 90s. These two countries became more interconnected after the turn of the millennium as Putin came to power in Russia, and took the country in a much more authoritarian direction after a flirtation with democracy. This isolated Russia from the west, and made them deepen their connections with other authoritarian countries, such as Iran and North Korea as well. China was also on this list, though due to their more soft power foreign policy they kept a more neutral position on global issues, rarely getting directly involved in international disputes as Russia has (Wagner group in Syria, Chechnya, Georgia). Thus they have managed to stay a much more interconnected country than Russia, with more positive relations around the globe.
Now Russia is using China as a way to bypass the sanctions which have been imposed on them from the West, allowing them to mitigate the economic fallout which economists had predicted. Russia was the fourth-largest economy for volumes of renminbi trading in February 2023, yet didn’t feature in the top 15 before its invasion of Ukraine. This has only furthered Sino-Russian trade, which hit a landmark $185 billion in 2022 (FT), leaving previous records in the dust.
“If Beijing decides to devalue its currency overnight…
Russian reserves go down, trade contracts are disrupted —
and Moscow can do nothing about it.”
On the surface, this is good news for Russia, and there are still positives for them in this situation, yet it is not all sunshine and rainbows. Russia has switched out their reliance on the Dollar to an increasing reliance on the Yuan, and this leaves them exposed to China’s every whim – a notoriously fickle mistress. To pin ones whole economy on the choices of the CCP’s economic policy, which is as unpredictable as they come, is a severely risky move and one which could end up shooting Russia in the foot. Natalia Lavrova, chief economist at BCS Global Markets said in an interview with the FT “If Beijing decides to devalue its currency overnight… Russian reserves go down, trade contracts are disrupted — and Moscow can do nothing about it.” There is a famously opaque window into the inner machinations of the CCP and to stake their economy on it shows how desperate Russia is following the sanctions.
As much as the close historical relationship and political similarity has been stressed earlier in this article, for both parties involved, China especially, this deal is purely opportunistic. As such, this agreement only lasts as long as it is in China’s economic interest, their one true aim. China’s largest trading partner is Europe and the EU, and taking such a close stance to Russia is putting them at odds there. Their “no-limits” partnership with Russia has managed to mostly unify a once fractured Europe in a more anti-Sino attitude. If this continues and China starts to see a reduction in trade as a result, they are likely to take a more hawkish attitude towards Russia so as to preserve their exports. They are unlikely to ditch them in an instant but this close co-operation publicly could become more coercive privately if the current arrangement isn’t seen to be in China’s best interests.
If this succeeds however, it could cause massive ramifications for the West. America is just as dependant on the global reserve being in Dollars as the rest of the world is dependant on having the Dollar in reserve. Other countries have shown tentative interest in switching to non-Dollar options over the last decade due to the US’s increasing weaponisation of it, and the want for a safe reserve if relations go south. Saudi Arabia has toyed with the idea of pricing its oil in Yuan. If this was to become the case, the worlds 2nd, 3rd and 4th largest oil producers would all be trading in Yuan, causing massive global complications and forming a serious counter to the USD as the world reserve due to the worlds continued reliance on oil.
The new collaboration of Russia and China is a scary sight for the West and one which could pose serious problems regarding the future of the USD as the global currency. However, this collaboration is more bark then bite, with global reserves of the renminbi only totalling less than 3% according to the IMF. There is still a long way to go before the Yuan could possibly contend against the Dollar as an out and out competitor for global dominance, especially given how tenuous Russia and China’s alliance is. They both have a mutual enemy in the West, though to different degrees, but China’s largest trading partner is still the EU and to lose that would cause untold devastation in its economy. They will only align themselves with Russia while it’s in their economic interest, if it puts them too much at odds with the EU this plan will simply crumble. With the vast majority of global trade still being conducted in USD, and a tentative Sino-Russian alliance, it looks unlikely the Yuan will be rivalling the Dollar for a long time.
By Milo Herdale
Sources
Washington Post: https://www.washingtonpost.com/opinions/2023/03/24/us-dollar-strength-russia-c
FT: https://www.ft.com/content/65681143-c6af-4b64-827d-a7ca6171937a
WSJ: https://www.wsj.com/articles/russia-turns-to-chinas-yuan-in-effort-to-ditch-the-dollar-a8111457
Business Insider: https://markets.businessinsider.com/news/currencies/dollar-vs-yuan-chinese-currency-usd-russia-moscow-beijing-sanctions-2023-4
Quartz: https://qz.com/yuan-dollar-china-russia-ukraine-currency-reserves-1850249569