Russia Embraces Chinese Yuan as Attack on US Dollar Continues
Invezz.com – The relationship between Russia and China continues to strengthen. Chinese President Xi Jinping is currently on a state visit to Russia, where several announcements have been made to consolidate future economic cooperation between the two countries.
Perhaps one of the most striking is Putin’s endorsement of the preferred currency for international trade.
We are in favor of using the Chinese yuan for agreements between Russia and the countries of Asia, Africa and Latin America. I am sure that these forms of yuan settlement will develop between the Russian partners and their counterparts in third countries.
Vladimir Putin
Why is Russia getting rid of the dollar?
Despite a joint statement by the two presidents that the economic agreements, numbering 14 in all, were “not adversarial in nature…and were not directed against (other) countries,” the move is widely seen as a continuing effort to Putin to get rid of the dollar, which has been the world’s reserve currency since World War II.
Russia has been hampered by Western sanctions since it invaded Ukraine in February 2022. One of the most impactful of these sanctions has been the closure of its SWIFT banks, the international payment channel.
This has made it significantly more difficult to make payments in dollars or euros. As a result, he has been forced to look for alternatives.
Some analysts fear that the Russian economy is already too dependent on the yuan. Even before the war in Ukraine, Russia had been making plans to reduce its dependence on the dollar. Now, they have been forced to speed up those efforts.
The proportion of foreign currency in Russian banks fell to 15% in the third quarter of 2022. Payments in yuan in the Russian market increased by 32%, while payments in dollars and euros fell by 52% and 24%, respectively. Even on the Russian stock market, the yuan’s share of transactions has risen from 3% to 33%.
Will the dollar always be the reserve currency?
It follows growing cries around the world that the dollar’s dominance may be waning, even as it still maintains absolute control over the world’s reserve state.
The IMF released a paper in 2022 assessing the “stealthy erosion of the US dollar.” It showed a coin that still holds an absolutely dominant hold on the top spot, but also presented reason to believe that it was trending lower.
Central banks were allocating more to non-traditional currencies, while the dollar’s share of world trade was also declining.
Of course, the world has changed a lot since then. The document was released in March 2022. Since then, inflation has skyrocketed and the world has moved into a tight monetary regime, with one of the fastest rate-raising cycles on record.
With inflation running rampant, the dollar has strengthened against other currencies as investors have flocked to it given its safe-haven properties and status as the world’s reserve currency, albeit with a pullback in recent months as that inflation has eased.
However, the strengthening of the dollar against the other major currencies does not necessarily mean that its place as a reserve currency is doing the same.
Russian and Chinese efforts will continue to try to erode that status. Until now, the dollar has remained king, but it is certainly fair to say that the threat from the Chinese yuan has grown substantially in recent years.
Its ties to Russia, and Russia’s assertion that it will continue to boost the yuan for trade, is just the latest reminder of that.
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