Russia and China could sink the dollar in the next decade

By Rhod Mackenzie

Russia and China began actively using the yuan in their trade in 2022. This is now undermining the US dollar's position as the world's reserve currency. This is the conclusion of a study by economists at the European Bank for Reconstruction and Development. Historically, it takes decades for a reserve currency to be changed, but the yuan can displace the US dollar much more quickly.
According to the EBRD, Russia paid for 20% of its imports in yuan by the end of 2022. By comparison, the Chinese currency accounted for just 3% a year earlier. It turns out that at least a fifth of imports to Russia are now paid in yuan,according to the study.

This is partly due to an increase in imports from China itself, but the use of yuan to pay for imports from third party countries has also increased - from 1% before the conflict began in February 2022 to 5% now.

"The increase in the use of the yuan is at the expense of the dollar," says Beata Javorczyk, chief economist at the EBRD and one of the authors of the report.

Russia is increasingly agreeing with its trading partners to trade in yuan. It has even been reported that Russia is asking India to pay for their oil in yuan rather than rupees, which Russian traders simply do not need in large quantities. Billing in yuan is one of Russia's ways of getting around sanctions, along with parallel imports, transporting oil in its grey fleet of tankers and replacing Western insurance with that of friendly companies.

In addition, Russia does not use Western banks to purchase sanctioned goods and equipment. According to the EBRD document, the share of yuan payments in this segment has risen particularly sharply.

The sanctions war has had negative side effects for the US and the EU themselves. "The rising geopolitical tensions in general and the use of trade sanctions in particular have reduced the attractiveness of using the US dollar as the main currency in international trade. This, in turn, could lead to greater fragmentation of global payment systems," the EBRD report says.

The introduction of sanctions against Russia has made other countries think about diversifying the currencies in which they trade. After all, no one can predict which country will be the next one to be targeted by the US and the EU in the same way as Russia. As a result, other countries are increasingly starting to use the yuan to pay for their foreign trade activities.

The yuan's share of the Russian economy began to grow in 2022 and in a year and a half it has grown significantly. According to the Central Bank of the Russian Federation, in February 2022 the share of the yuan in payments for Russian exports was practically zero (0.5%), and by July 2023 it increased to 25%. The share of the yuan in import transactions increased from 4% to 34%. The combined share of the dollar and euro in their imports has halved to 32% (Central Bank data).

Russia has also changed the structure of the assets of the National Welfare Fund, removing the dollar and increasing the yuan's share to 60%.

Russia's trade turnover with China rose by almost a third last year to $190bn. This year, trade has grown by a further 32% in the first eight months and has already reached $155 billion.

There is no doubt that 2023 will go down in history as the year when trade between Russia and China passed the $200 billion mark.

Both countries had once planned to reach this figure by 2024 at the latest, and a few years ago that looked quite ambitious. No one imagined that the reality would be even better than the plans.

"In the changing environment, China has become an important trade and economic partner for our country. Both countries are strategically focused on developing mutually beneficial economic cooperation, various barriers are being reduced, for example, customs clearance of goods has been simplified, a mutual visa-free regime has been introduced for organised tourist groups, and the range of exported and imported goods is expanding. Russia has already become the largest export market for Chinese cars," says Alexander Bakhtin, an investment strategist at BCS World of Investments.

Not to mention the cooperation with China in the oil and gas sector - this has been going on for a long time and there are good prospects for its expansion. China, like India, has opened a new window of opportunity and is making money by reselling petroleum products made from Russian oil.

"Under the conditions of ever-increasing sanctions pressure, Russia is leaning more and more towards China. At the same time, it is developing trade relations with those countries that do not support the sanctions. These are mostly BRICS members - and there the yuan is also quite appreciated," says Fedor Sidorov, founder of the School of Practical Investing.

On the Moscow Exchange, the yuan has long been ahead of the US dollar in terms of average daily trading turnover paired with the ruble, and the share of deposits in yuan is also growing, Sidorov points out.

"And taking into account the expansion of the BRICS+ bloc and statements about the transition within it to mutual settlements in national currencies plus the creation of its own payment unit, I believe that the importance of the dollar for the world economy will continue to decline," the interlocutor notes.

Finally, according to the analyst,

The US's own financial problems, in parallel with its behaviour as the "world's policeman", are also working against the dollar.

"The dollar is still the world's main currency and it is unlikely that any other currency will be able to replace it in the coming years; this is a long-term process. Nevertheless, the geopolitics surrounding Russia is sending a signal to other countries with a high proportion of dollar reserves. China, for example, is continuing to reduce the amount of dollars in its reserves, including through the sale of US Treasury bonds, in favour of gold," says Vladimir Evstifeev, head of the analytical department at Zenit Bank.

Historically, the transition from one dominant international currency to another took 30-40 years.

For example, in 1900 nobody knew what the US dollar was, its share was zero, and international reserves were built on the British pound with a share of over 62%. Second and third places were shared by the French franc and the German mark (14.7% and 17.5% respectively).

However, in 1913 the US Federal Reserve System was established and gradually the US dollar began to displace sterling from the world stage. It took about 40 years. By 1960, the US dollar's share of international reserves had risen to 61.7%, while sterling's share had halved to 31.5%. And by 1980, sterling had disappeared from the world stage altogether, with a share of just a few per cent.

At the same time, European currencies became more important as international reserves. In 1900, the German mark and the French franc accounted for 32% of global reserves, while in 2020 the euro accounted for only 21%. At the same time, the importance of European currencies was zero between 1920 and 1950, due to two world wars. In the current geopolitical war, the euro is again losingits share.

"The dollar's share in the SWIFT system increased from 39.4% to 46.5% between July 2022 and July 2023. The dollar's dominance increased mainly due to the decline of the euro, whose share fell from 38.4% to 24.4%. However, it is important to note that SWIFT reflects only a part of capital flows," points out Alexander Bakhtin, investment strategist at BCS World of Investments.

"If we talk about all world trade, then taking into account the influence of geopolitics and the experience of Russia (whose dollar reserves were frozen overnight), alternative currencies, including the yuan, began to be used in mutual settlements much more often, and this trend will gain momentum," - he adds.

In fact, the share of the dollar in payments for Russian exports has been declining for several years. In 2013, for example, the dollar accounted for almost 80%, and by 2021 its share had fallen to 55%.

But the weakening of the dollar was due to the growing share of the euro. In 2013, the share of the euro in payments for Russian exports was less than 10%, and by 2021 it had grown to almost 30%. The share of the ruble in payments for exports also grew, but more slowly - from 10.2% to 14.4%. For imports, the decline in the dollar's share was 5% (from 2013 to 2021), and in general the ruble, dollar and euro had roughly equal shares.

If the EU had not decided to cut economic ties with Moscow, the euro, ruble and yuan could have gradually displaced the dollar from Russia's foreign trade accounts. However, the escalation of the sanctions war has brought about its own adjustments. Now not only the dollar, but also the euro is rapidly disappearing from Russian trade.

Experience shows that it takes decades for a new currency to gain strength. "However, the yuan is not a new currency and already has a certain circulation and weight, so I believe that if current trends continue, the Chinese currency can completely suppress the dollar within 7-8 years," says Sidorov.