Media from some countries sympathetic to the Kremlin and Beijing are reporting that Mongolia and Russia are now trading in yuan and rubles. These reports, however, are part of a recent uptick in pro-Russia, pro-China and pro-BRICS propaganda that heralds the demise of the American dollar. The truth is, however, that the dollar very much remains the currency of international trade.

While there are increasing examples of countries settling trades in other currencies, many of these trades still have to be cleared through dollars. International trade is almost never priced in currencies other than the dollar in order to minimise the impact of currency-pair fluctuation.

The most prominent example of a country shifting away from the use of dollars in trade would be Russia. Due to strict sanctions imposed by the United States and Western nations, Russia has been forced to increasingly use rubles and yuan in trade with China, and is now also increasingly turning to bartering.

Chinese banks, fearing US sanctions, are no longer willing to process dollar trades with Russia. Additionally, Moscow has been forced to cease trading in euros and dollars on its exchanges.

Russia, not surprisingly, is finding it difficult to work out a replacement for the dollar, as most global currencies, such as the rupee, are weaker, less convertible and less stable. Russia and China have urged India to use yuan when trading with Russia, but New Delhi is hesitant because the yuan is only partially convertible.

Russia’s situation demonstrates that countries generally prefer to trade in and hold dollars and will only abandon the dollar when forced to do so. Despite all the talk between Russia, China and BRICS members about de-dollarisation, the dollar still accounts for 58% of all foreign currency reserves, 54% of trade settlement and 88% of all currency pair exchanges.

The dollars counted in foreign currency reserves only account for US dollars and dollar equivalents, such as federal Treasury bonds. Dollar equivalents refer to highly liquid and widely accepted dollar-denominated assets that are directly convertible, ensuring stability and ease of transaction. They do not include US agency bonds, which are issued by government-sponsored enterprises like Fannie Mae and Freddie Mac. These agency bonds, while low-risk, are not directly backed by the US government and lack the same level of liquidity and universal acceptance as Treasuries. Consequently, they are not considered dollar equivalents.

Foreign countries hold significant amounts of US agency bonds in their investment portfolios, but these holdings are separate from their official foreign currency reserves. Consequently, the total amount of US dollars in foreign reserves is higher.

Additionally, countries hold IMF Special Drawing Rights (SDRs) in their reserves, which are at least 43% composed of US dollars. This further increases the percentage of dollars in reserves, underscoring the world’s reluctance to de-dollarise.

Mongolia is not under sanctions like Russia and, consequently, it generally prefers to conduct trade in US dollars. The country’s biggest exports are commodities, such as coal and metals, which are typically priced and traded in dollars. Therefore, exports are a means of obtaining dollars. The Bank of Mongolia, the central bank, needs these dollars to carry out open market operations and to support the value of the national currency, the tughrik, or MNT. They hold US dollars in their reserves and also need US dollars to service foreign debt. Dollars are also required to repatriate earnings to investors, purchase new equipment for the mines and pay foreign experts who have the skills necessary for mining and other critical sectors.

Apart from mineral exports, cashmere, meat, milk and leather, Mongolia produces very little in the way of finished products and is forced to import everyday needs like shampoo, packaged foods, vegetables and fruit from abroad. These imports must be paid for in US dollars.

The tughrik is nonconvertible and has been steadily losing value over the past four years, so exporters are unwilling to accept tughrik as payment for Mongolia’s imports. While trading with Russia in rubles would leave Ulaanbaatar with a currency useless for other international trade, accepting some limited quantity of yuan for mineral exports could make sense if matched with imports from China paid in yuan. However, holding excess yuan is impractical due to its semi-convertibility.

Despite propaganda, Mongolia's trade with Russia and China continues to be largely in dollars. The use of yuan might increase somewhat, but for the most part, Ulaanbaatar needs to continue to trade in dollars. Mongolia's strategic location between Russia and China presents both opportunities and challenges. While its reliance on the US dollar for trade provides stability and access to global markets, Mongolia must also navigate the economic influence of its neighbours.

China's Belt and Road Initiative (BRI), the China-Mongolia Economic Corridor (CMEC) and the Power of Siberia 2 gas pipeline, which is to connect Russia and China through Mongolia, have led to increased investment and infrastructure development in Mongolia, further integrating the three economies. This relationship encourages some trade in yuan, especially for transactions directly tied to Chinese investments.

However, Mongolia remains cautious about over-reliance on the yuan due to the mentioned semi-convertibility and potential economic leverage presented to China.

Simultaneously, Mongolia's historical and economic ties with Russia necessitate careful management of ruble transactions, especially given the ruble's limited international acceptance. Thus, Mongolia's economic policies reflect a balancing act between leveraging regional opportunities and maintaining economic sovereignty through dollar-based trade.