Russia and China reduce share of dollar in trade to less than half

The US dollar’s share in trade between Russia and China fell below 50% for the first time on record in the first quarter of 2020, reports Nikkei Asian Review. According to data from Russia’s Central Bank and Federal Customs Service, only 46% of settlements between the two countries were made in dollars, while euro and national currencies made up all-time highs of 30% and 24% respectively. The two countries have lowered the share of the dollar in bilateral trade over the past several years. In 2015, about 90% of bilateral transactions were conducted in dollars, while last year, the figure amounted to 51%.

Director of the Institute of Far Eastern Studies at the Russian Academy of Sciences Alexey Maslov considers that the Sino-Russian de-dollarisation is approaching a “breakthrough moment” that can elevate their relationship to a de facto alliance. “Many expected that this would be a military alliance or a trading alliance, but now the alliance is moving more in the banking and financial direction, and that is what can guarantee independence for both countries.”

For Russia, replacing the dollar in trade settlements became a necessity to sidestep US sanctions imposed in 2014. Beijing started taking things more seriously when Donald Trump’s administration imposed tariffs on Chinese goods worth hundreds of billions of dollars. The Chinese state and major economic entities “only very recently” began to feel that they might “end up in a similar situation as our Russian counterparts: being the target of sanctions and potentially even getting shut out of the SWIFT system,” said Zhang Xin, a research fellow at the Centre for Russian Studies at Shanghai’s East China Normal University.

In 2014, Russia and China signed a $24,5-billion agreement enabling the countries to gain access to each other’s currency without having to purchase it on the foreign exchange market. Last year, President Vladimir Putin and President Xi Jinping also agreed to replace the dollar with national currencies for international settlements between their countries and develop an alternative to the US-dominated SWIFT network for conducting trade in rubles and yuan.

Moreover, Russia has been rapidly shifting from dollar to yuan while accumulating national reserves. By the beginning of 2019, the Bank of Russia has slashed its dollar holdings by $101 billion, which was over half of its existing dollar assets. At the same time, the regulator invested $44 billion into the Chinese currency. Thus, the share of yuan in Russia’s foreign exchange reserves has increased from 5% to 15%. Currently, Russia possesses a quarter of the world’s yuan reserves. The Kremlin also granted permission to Russia’s National Wealth Fund to begin investing in yuan and Chinese state bonds earlier this year.

Moscow wants not only to diversify its foreign exchange reserves but also encourage Beijing to become more assertive in challenging Washington’s global economic leadership, considers Maslov. “One way for Russia to make China’s position more decisive, more willing to fight is to show that it supports Beijing in the financial sphere,” he says.