How Russia & China are Ditching the Dollar
With the unwitting help of the EU
Dear all
Today we continue our China-Russia theme by looking at something that, on the surface, might seem a little dull, or at least technical: the currency they use to trade with each other. In fact, it is a good way to understand China’s plans to project more global power by the gradual internationalisation of its currency, and thereby undermine American hegemony. I also look at how the EU is unwittingly being used to further China and Russia’s aims.
I’ll be back on Saturday with the latest in our History of China series (we’re up to the fall of the Han Dynasty, and the incredible battles that accompanied it).
In the meantime please do comment, share, and subscribe.
Many thanks for reading.
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In March this year the Russian foreign minister, Sergei Lavrov, travelled to China and made renewed calls for Moscow and Beijing to reduce their dependence on the dollar. It was, he said, necessary to do so in order to push back against the West’s ideological agenda.
The two countries have already been working to reduce their use of the greenback in trade. For Russia it makes sense given the American sanctions that have been in place since its invasion of Crimea in 2014. In turn, China is increasingly concerned by the risks of America waging financial war against it, as I wrote about here.
Russia’s drive to reduce its dependence on the dollar looks to be working, at least in the sphere of its trade with China. Russian exports settled in US dollars fell below 50% for the first time in the last quarter of 2020, down from 90% in 2015. In this they have China’s strong support. Jiang Yi, a deputy director of Russian studies at the Chinese Academy of Social Sciences, said that it makes sense for Russian and Chinese companies to expand the use of the rouble and the yuan, especially the trade in bulk commodity goods such as crude oil, energy and military equipment from Russia. “As some of those goods are subject to US unilateral sanctions, it can be a way for Chinese enterprises to avoid secondary sanctions," said Jiang.
Why the Rouble and Yuan Won’t Do
The question is, if they aren’t using the dollar to finance the trade between them, then what are they using? Ideally they would use their own currencies, the rouble and the yuan, but there are significant problems with this.
First, there are structural issues that prevent the widespread use of these currencies internationally. China does not allow a 100-percent free conversion of foreign capital, which makes it less than ideal for funding economic exchange between the nations. Another problem with the RMB as an international currency is that, because of capital controls, no one has any idea what it's real market value is. Work by Stewart Paterson at Capital Dialectics shows that if the Chinese decided to internationalize their wealth to the same degree that Americans have done, and were allowed to, then USD 22 trillion worth of RMB selling would be required. This would leave the RMB’s value seriously in question, and therefore undermine its use in trade.
Russia’s currency is also not easy to use for trade. Not only is the rouble relatively volatile, which adds risk, but there is an inbuilt reticence by China to use it in international trade. As a petro-currency (oil and gas account for aproximately 60% of Russia's exports and represent more than 30% of the country's GDP), and with China an oil importer, it is very much in China’s interest to see a weaker rouble because of a lower oil price. As one analyst put it to me, “Why would China want to use a currency which, ideally, it would like to see collapse because of weak underlying fundamentals?”.
Second, there isn’t the financial infrastructure in place between the two. As of 2019 Russia had just one bank in operation in China, while China had two in Russia, and it is unlikely that these numbers have grown substantially, if at all, in the last few Covid-impacted years.
Not Dollars, But Euros
Instead, Russia is swapping out the dollar from its China trade and replacing it with another currency. According to figures from Russia’s central bank, more than three-quarters of Russia’s trade with China is now settled in euros.
The use of the euro raises some interesting issues for the EU. In many ways the increased use of the euro as an international currency is exactly what Brussels wants as part of its plan for Europe to “assert itself more on the world stage”, as the President of the European Council, Charles Michel, stated last year. In his speech to the Centre for European Policy Studies, Michel suggested that a “stronger international euro” would play a great part in this.
It probably isn’t in the EU’s plan, however, to have Russia and China be the ones to push this internationalisation of its currency. Much of Europe has been at odds with Putin’s Russia in recent years, especially since the 2014 Crimea invasion. EU-China relations, on the other hand, looked to be more rosy, and were warm enough for a limited trade agreement – the EU-China Comprehensive Agreement on Investment (CAI) – to be signed earlier this year.
Unfortunately for those who believe in a stronger EU-China link, the CAI is not going to happen anytime soon after its ratification was suspended by the EU. This was in retaliation for China laying sanctions on several members of the European Parliament as well as other institutions, like Merics, Europe’s leading China-watching platform.
The EU could theoretically take action to stop China and Russia using the euro if it really wanted, but it would be hard to reach internal consensus on this any time soon. China, however, will be well aware that a deterioration in either its or Russia’s relations with Europe might make this more likely.
A Digital, International Yuan
In reality, the best and only way for China and Russia to escape foreign intervention in their trade flow is to rely on one or other of their currencies. To that end, the internationalisation of the yuan is probably the most likely route this will take, and within that, the use of a digital version of the currency. In recent months Beijing has sped up the development of its digital RMB, mainly for domestic use, but with one eye on the future. China’s central bank vice governor Li Bo said in April this year that his country would cooperate with other countries “to find a solution for cross-border payments in the long run”.
The internationalisation of the RMB, whether digital or not, is still China’s goal because it is determined to break the dominance of the dollar, and with it, America’s inbuilt economic advantages and its influence over the global economy. The fact that Beijing has to rely on an intermediary currency like the dollar or the euro to mainly trade with its anti-Washington friend Moscow is a strong an indication as any that neither country can yet break away from the US-dominated financial system – yet.
But for an indication as to how well China’s RMB internationalisation efforts are going, it’s worth keeping an eye on what currency it uses for trade with Russia.