Russian Deputy Prime Minister Alexander Novak said on April 25 that Russia is now settling more of its international trade deals with yuan than it is with dollars.

The unintended consequence of the US’ decision to weaponise the dollar and use it as part of the extreme sanctions regime on Russia has been to shock the world’s central banker community and undermine confidence in the dollar as the default foreign exchange currency of trade and reserves.

The result has been to give impetus to the long-mooted desire to break the dollar’s monetary hegemony, so that there is for the first time some real political will behind making the change.

The dollar has been the foundation on which global trade has been built since the Bretton Woods agreement in 1944 and that foundation is now starting to crumble. While developed markets are confident that the US will never sanction their use of the dollar, the same is not true for the global second-class citizens of the emerging markets. The EMs are now rushing into gold as the ultimate store of reserves value and actively rolling out programmes to settle their international trade deals in national currencies.

The switch away from the dollar will take a long time, but the process has begun. (chart)

De-dollarising Russia 

Russia has been de-dollarising for years. The Central Bank of Russia (CBR) has been actively increasing its share of gold as a monetary reserves since 2007 and since the annexation of Crimea it has been actively selling off its dollar cash and securities. Today the central bank has no dollars left in its reserves and by the end of this year it intends to hold only yuan (60%) and gold (40%).

That will make Russia unique amongst the world’s big economies, as no one else would dare to concentrate its store of sovereign of wealth in so few monetary instruments. But since the imposition of the CBR sanctions in the first days of the war it has been cut off from using the dollar – the world’s preferred means of exchange.

Russia is still actively exporting and needs some sort of currency to settle its bills. Of the currencies on offer, the Chinese yuan is the leading choice and Beijing has also been actively promoting the internationalisation of its legal tender.

But Moscow is not alone in wanting to reduce the role of the dollar. In addition to China, India and Brazil have also both started programmes to use their own currencies in trade deals. Brazilian President Luiz Inácio Lula da Silva has even suggested setting up a pan-South American currency to facilitate trade on the continent – a Latin American equivalent of the euro.

That is still a while away and energy deals in particular are driving the current switch. Russia accepts more payments for energy exports in rubles than anything else since the Kremlin forced the gas-for-rubles deal on its European customers last March.

The increase in ruble usage was primarily due to natural gas supplies to “unfriendly” countries shifting to rubles in May 2022 following the introduction of the new rules, according to the CBR.

According to the Russian central bank, the yuan's share in Russia's import settlements in 2022 jumped to 23% from 4%.

"The yuan and ruble are in high demand, so that vector will continue. China already pays in yuan for gas and partially for oil, there are settlements in the ruble as well," Novak told Russian state TV.

The ruble's share in Russia’s export payments rose to over 30% by the end of last year, surpassing the euro's share, and became equal to that of the dollar, according to the CBR’s "Review of the Russian Financial Sector and Financial Instruments" released in April.

Nevertheless, the dollar (and to a less extent the euro) continue to play the central role in Russia’s trade. Despite the ruble's surge in the share of foreign exchange deals, the overall weight of the dollar and euro in payments for both export and import supplies in Russia amounted to slightly less than 50% by the end of 2022. This figure is in line with the country's general foreign trade structure.

Global de-dollarisation has been a long-standing trope, but now there is some political will behind actually implementing it and US officials are starting to get worried.

Former Treasury Secretary Lawrence Summers warned of “troubling” signs that the US is losing global influence. And the current secretary, Janet Yellen, also warned that there are signs that the dollar will also lose its dominance of the global financial system at some point.

The dollar has come into focus as a US yoke under which EMs labour. The ubiquitous use of the dollar to settle international trade deals gives the US enormous power as well as the ability to borrow an almost infinite amount of money.

But this system is in danger of breaking down, warn experts. It will take a long time, probably decades, but the weaponisation of the dollar in the US drive to punish Russia has unleashed some powerful tectonic forces that have already seen a flight from dollars and the yuan’s use in international trade double in just one sort year, albeit still taking only a small share.

The economic sanctions imposed on Russia and other countries by the US “put the dollar’s dominance at risk as targeted nations seek out an alternative,” Yellen said on April 25, 2023.

“There is a risk when we use financial sanctions that are linked to the role of the dollar that over time it could undermine the hegemony of the dollar,” Yellen said.

“Of course, it does create a desire on the part of China, of Russia, of Iran to find an alternative,” she told CNN’s Fareed Zakaria in an interview. “But the dollar is used as a global currency for reasons that are not easy for other countries to find an alternative with the same properties.”

These concerns are music to the Kremlin's ears. Russia’s most effective counter to Western sanctions would be to break the dollar’s hegemony over international trade. That would be far more damaging to US power than any sanctions the West can impose on Russia.

"The Americans have started the de-dollarisation process. Already now this process is being analysed particularly by American political analysts and economists with deep concern," Russian Foreign Minister Sergey Lavrov told a press conference following a visit to New York as part of Moscow's presidency of the UN Security Council.

Yuan on the rise

The other big EMs looking for an alternative to the dollar are also turning to the yuan as the obvious replacement. The US decision to weaponise the dollar in its sanctions war with Russia has shocked central bankers around the world, undermining their confidence in the currency and galvanising them into actively reducing their exposure to the US-controlled currency.

The yuan’s share of global trade finance has more than doubled since the invasion of Ukraine last year, an analysis by the Financial Times found. “A surge that analysts say reflects both greater use of China’s currency to facilitate trade with Russia and the rising cost of dollar financing,” the paper reported in April.

Russia’s trade with China is booming, topping a record $185bn in 2022, and is expected to realise Moscow and Beijing’s mutual goal of $200bn this year – a year earlier than expected. Russian companies are already paying for most of their Chinese imports in yuan, and trading in yuan on the Moscow Currency Exchange has also soared as a result. Russian companies may be cut off from SWIFT, but they have access to China’s Cross-Border Interbank Payment System (CIPS) that allows direct transactions between the two countries, and could eventually offer an alternative to SWIFT. Total settlements on CIPS came to CNY97 trillion ($14 trillion) in 2022, central bank data showed, a year-on-year increase of 21%.

Another factor pushing traders to switch to the yuan has been the extremely rapid rise in US interest rates, which has increased the cost of using the dollar. The Fed has been aggressively hiking at its fastest pace ever – the Fed hiked rates nine times since last year – in an effort to contain soaring US inflation, while the People’s Bank of China (PBC) has cut rates twice in the last year, making borrowing in yuan cheaper.

Of course the yuan (or even the euro) is a very long way away from pushing the dollar off its pedestal: 84.3% of international trade deals in February this year were still settled in dollars, down from 86.8% a year earlier, whereas the yuan’s share of total trade has risen from less than 2% in February 2022 to 4.5% a year later, according to the FT. Those gains put China’s currency in close contention with the euro, but even that only accounts for 6% of total global trade deals.

Nevertheless, currency traders were still shaken by the sudden jump in the use of the yuan, and 4% in their world of multi-billion dollar trades is still a substantial change and a win for Beijing’s campaign to boost the yuan’s use.

While the use of yuan in total international trade remains tiny, it is already starting to dominate trade at a regional level, especially in Asia. Russia already settles the largest part of its trade with China in yuan, but China too has just seen the yuan overtake the dollar in its own international trade.

The Chinese yuan surpassed the dollar to become the most widely used cross-border currency in March, according to Bloomberg, hitting a historic high of 48% at the end of March, against practically zero in 2010. Meanwhile, the share of the dollar in Chinese foreign trade fell from 83% to 47% over the same period. The analysis included all types of transactions, including securities trading between the capital markets of mainland China and Hong Kong.

Despite the increasing role of the yuan, the total volume of world trade in 2022 amounted to $32 trillion, while the total volume of China's foreign trade during the same period was CNY42.07 trillion (over $6.2 trillion). However, in January 2023, the PRC Customs Administration announced that trade turnover between Russia and China grew by 29.3% in 2022 to a record $190.27bn.

But there are still many headaches slowing the yuan’s rise. The PBC has been pushing the use of yuan for years, but that ended in a devaluation and sever capital flight in 2015, after which the regulator introduced strict currency controls. Those have lessened the appeal of China’s currency for other countries. A comprehensive set of derivative products is also still needed for hedging currency movements that are par for the course in trade financing. While the use of yuan in trade has doubled to 4%, its use in currency deal done via SWIFT has remained stuck at 2%, reports the FT. As a result for the moment, the PBC is focusing on promoting the yuan in the settlements of commodity trades and leaving the more generic currency trading or use as a store of value in reserves for later.

President Vladimir Putin has repeatedly called for a switch away from the dollar but has joined Beijing in encouraging Russia’s leading trade partners to adopt the yuan. During China’s President Xi Jinping three-day trip to Moscow in March Putin repeated that half of Russia’s trade with China is settled in national currencies and other members of the Russian-led Eurasian Economic Union (EAEU) should think about doing the same.

Since the start of the war there has been a rapid yuanisation of the Russian economy with the CBR switching from the dollar to the yuan for market interventions and regular Russians changing their hard currency accounts from dollars and euros to yuan.

Last month Brazil signed off on a similar deal with China that allows all the South American countries to settle trade deals in yuan and their own currencies. A pool of EM trade deals in non-dollar currencies is developing with the yuan as the anchor currency that will allow of multi-currency trade outside of the dollar world.

“Every night I ask myself why all countries have to base their trade on the dollar,” Brazil’s President Luiz Inácio Lula da Silva said in an impassioned speech at the New Development Bank in Shanghai, known as the “BRICS bank”.

“Why can’t we do trade based on our own currencies?” he added, drawing loud applause from the audience of Brazilian and Chinese dignitaries. “Who was it that decided that the dollar was the currency after the disappearance of the gold standard?”

Like Russia, Brazil’s bilateral trade has ballooned over the past decade to reach $150.4bn last year – not far behind that of Russia – with China buying Brazil’s agricultural commodities and minerals and investing in the Latin American country’s large consumer market and infrastructure sector.

Like Putin, Lula called on Emerging Markets (EMs) to work towards replacing the dollar with their own currencies in international trade, lending his voice to Beijing’s efforts to end the greenback’s dominance of global commerce.

India has also launched a campaign to reduce the share of the dollar in its international trade and settle deals in national currencies, although Reuters reported that Delhi would rather not to settle deals with Russia in yuan and prefers using the UAE’s dirhams.

In April the Reserve Bank of India (RBI) invited additional central banks from 18 countries – including Fiji, Germany, Guyana, Israel, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, the UK, as well as several from Africa, including Botswana, Tanzania, Kenya and Uganda – to open special Vostro Rupee Accounts (SVRAs) that will allow them to settle payments in Indian rupees as part of a massive move to de-dollarise trade. In all the RBI has signed 60 SVRA agreements in the last year.

The UAE’s dirham is another candidate for settling international trade, as its value is based on oil exports and trading. Russian oil is being increasingly traded on the Dubai exchange and the price quoted in the local currency as an alternative non-dollar market to those in the West for this oil.

The tense relations between China and India have made Delhi reluctant to hold or use yuan. Thousands of Indian and Chinese troops are locked in a standoff along their disputed Himalayan border since 2020, casting a shadow over the whole relationship.

But relations with Moscow have gone from strength to strength. India’s oil imports from Russia have risen from next to nothing in 2021 to 1.5mn bpd now and in the first quarter of this year some Indian refineries have started to pay for their crude imports in rubles, although the details of the interaction between the two central banks is still being worked out.

In the meantime, the UAE’s dirham remains the currency of choice for settling deals. The problem with settling deals using the Indian rupee is that it is only partly convertible – it has to be changed into dollars before it can be changed in other currencies – making it unattractive for Russia.

Long term, Russia would like to get rid of national currencies altogether. The Kremlin has already launched a long-term project to introduce a CBR-regulated digital ruble, despite the regulator’s initial mistrust of electronic currencies.

The use of digital currencies in international payments will be completely unrestricted, Russian Finance Minister Anton Siluanov said on April 22.

"We are launching an alternative system of payments based on modern technologies (digital financial assets, digital currencies)," the minister said. "Digital currencies could be used in cross-border payments. This is just at the earliest phase of discussions, but the future lies with the use of the digital ruble, the digital yuan and other similar currencies. This is a system of payments that is bound by no restrictions. Two parties come to an agreement, make settlement payments, and no other country could step in and freeze such payments," Siluanov noted as cited by Tass.

Earlier, the CBR said that the entire system of cross-border payments would undergo a transformation and could be based on national digital currencies in five to seven years.

The Russians have also started work on building digital exchanges with their own coins to trade commodities like metal that also provide the backing of the value of the coin. Like China’s emphasis on using trade to encourage the use of the yuan, Russia is hoping to use access to its vast store of minerals as a mechanism to get commodity traders to start settling deals using a digital ruble and so abandon money altogether. But that is a very long-term project.