Moscow – The gradual shift away from dealing in the U.S. dollar has been a prominent feature of economic and trade cooperation between Russia and China over the past year, with both countries taking tangible steps towards what could be termed a "financial alliance."
According to Russian Prime Minister Mikhail Mishustin, in 2023, Russia and China converted more than 90% of their trade to the yuan and ruble. This, he states, demonstrates an almost complete elimination of the dollar in the economic relations between the two nations.
Although Russia's movement towards reducing its reliance on the "king of currencies" began after the 2008 crisis—when the unipolar financial system exposed vulnerabilities, harming trade, production, and employment—it has intensified with western sanctions against Moscow, tying financial strength with geopolitical power. It is based on the premise that attempts to advance development, strengthen the military, innovate technology, and sustain a productive workforce require a solid economic base.
The ruble, however, witnessed a record decline during 2023, the highest in nine years, with the dollar increasing by 30%. Experts saw this as a negative outcome of capital outflow from the country, the adverse dynamics of oil exports at the beginning of the year, and the growth of imports.
Trimming the Dollar's Claws
Amid this reality, serious discussions between China and Russia have indeed taken place about integrating their financial systems. Moscow has assured Beijing that it is ready to use the yuan in its foreign exchange reserves to expedite the process.
Official Russian data reveals a qualitative leap in bilateral trade, accompanied by a currency swap arrangement. The trade volume between the two countries increased to reach $218 billion.
Based on the results from the first nine months of 2023, the total trade volume between Russia and China grew by 29.5% compared to the same period last year. In September alone, the trade between the two countries amounted to about $21.2 billion and continued to rise, reaching $21.5 billion in November.
Since the beginning of 2023, China has exported goods worth $81.4 billion to Russia, up by 56.9% from 2022. Russia, in turn, exported around $95 billion worth of goods to China, an annual increase of 12.7%.
This runs parallel with plans to convert Russian oil and gas payments, which will continue, according to Russian officials, as long as European countries believe they cannot reduce their reliance on Moscow without incurring unacceptable financial hardships.
Observers in Russia note that there is an effort by Moscow and Beijing to undermine the global dominance of the U.S. dollar, at least within their bilateral trade.
Economic expert Viktor Lashon believes this development heralds the beginning of the end of American financial dominance. Despite the dollar's overall recovery due to consumer spending and business investment to counter the economic fallout from the coronavirus pandemic and the exacerbated food shortage due to the war in Ukraine, it gave momentum to some of the world's largest economies to explore ways to circumvent the U.S. currency, including Russia and China.
According to him, China is not only an economic giant in terms of production and exports but also in terms of the size of its financial sector, currently the largest in the world, valued at $60 trillion, equivalent to 340% of China's GDP.
Despite the dollar's demonstration of strength in the first half of 2022 and its use as a tool for imposing sanctions on Russia, this has provided a new impetus for major economies to explore bypassing the American currency, with Russia and China at the forefront.
Canceling Dollarization
While no one is saying that the dollar will be displaced as the primary medium of exchange anytime soon, the "de-dollarization" has become a strategic option for Moscow and Beijing.
Some analysts suggest that moving away from dealing in dollars will not be as simple as some might think. According to the researcher at the Higher School of Economics, Vladimir Olichenco, the success of this process depends on the comprehensive development of the local market, as a condition for Russia's shift away from using the dollar, as it relies more heavily on sales in the foreign market.
The same applies to the Chinese economy, but unlike Russia, China is purposefully engaged in developing its local market, where the foreign market now represents an additional income, not the mainstay.
Olichenco points out that the steps China and Russia have taken to abandon the U.S. dollar have been accompanied by significant considerations, such as Russia's economy relying heavily on selling natural resources, timber, wheat, and other agricultural crops on the international market, in return for cash equivalents in U.S. dollars.
The problem for most currencies is that their exchange rate heavily depends on a narrow set of commodities—for Russia, energy resources, metals, and raw materials.
Since the price environment of these goods affects the country's balance of payments and consequently the ruble's exchange rate, such volatility does not allow the ruble to become a reserve currency. Therefore, no country wants its reserves in Russian currency to devalue due to fluctuations in oil prices, concludes Olichenco.
