Vladimir Poetin en Xi Jinping (Isopix)
–
Russia and China are working together to reduce their dependence on the dollar. A development that, according to some experts, can lead to a ‘financial alliance’.
Recent data from Russia’s central bank and customs show that the dollar’s share in trade between Russia and China fell to 46 percent for the first time in the first quarter of 2020. The euro was used in 30 percent of the transactions, the Chinese yuan and the Russian ruble in 24 percent of the transactions. That is also a new record.
Russia and China have seen their use of the dollar in bilateral trade over the years drastically reduced. Until 2015, approximately 90 percent of all transactions between the two countries were settled in dolar. But after the outbreak of the trade war between the US and China, both Moscow and Beijing began to strive to get rid of the dollar. In 2019, the dollar was still used in 51 percent of all transactions.
Decollarization is a priority in both Russia and China
Dedollarisering has been a priority in Russia since 2014. When Moscow clashed with the West over the annexation of Crimea, Moscow and Beijing were just reaching out to each other. To get around US sanctions against Russia, the dollar had to be replaced. That process gained momentum once the Trump administration also began imposing billions of dollars in tariffs on Chinese goods.
In 2014, Russia and China signed a three-year deal worth $ 24.5 billion. This allows both countries to use the other’s currency without having to buy it on the currency market. The agreement was extended for three years in 2017.
Another milestone came during the visit of Chinese President Xi Jinping to Russia in June 2019. Moscow and Beijing then signed an agreement to replace the dollar with national currencies in international agreements. Both parties then also reached an agreement to develop alternative payment mechanisms for the US-dominated SWIFT network.
Just weeks ago, Fang Xinghai, the vice-chairman of the Chinese stock market watchdog, also called his country to prepare to be cut off from the international dollar payment system.
Russia halved its dollar reserves
In addition to trading national currencies, Russia has rapidly built up the yuan’s reserves at the expense of the dollar. In early 2019, Russia’s central bank disclosed that it had reduced its dollar reserves by $ 101 billion – more than half of its existing dollar assets. One of the biggest beneficiaries of this evolution was the yuan, which saw its share of Russian foreign exchange reserves rise from 5% to 15%. That happened after the Russian central bank invested $ 44 billion in the Chinese currency. As a result of the shift, Russia acquired a quarter of all global yuan reserves.
Dollar will not be dethroned anytime soon
The international exchange market (Forex) is without a doubt the most important financial market in the world. Every day, $ 5.3 billion in currency is exchanged there. The volume of forex trading is thus about 53 times that of the New York Stock Exchange, 12 times that of the futures market and 27 times that of the stock markets.
The most traded currency is the US dollar, followed by the euro, the Japanese yen and the British pound. Although Forex trades in 170 different currencies, 85 percent of all trades are handled in 7 currency pairs, more commonly known as ‘majors’. The most important of these majors is the EUR / USD or the conversion from euro to US dollar. Then follow the USD / JPY (US dollar vs. Japanese yen), GBP / USD (British pound vs. US dollar), and the USD / CHF (US dollar vs. Swiss franc).
Dollar has 3 advantages
According to analysts, the dollar has three advantages that no competing currency can compete with for the time being.
- Limited inflation and depreciation.
- The size of the US domestic economy.
- The American financial markets are the largest in the world and have almost unlimited liquidity.
But… If the dollar’s position is secure for the time being, in addition to the US debt mountain, an overly aggressive sanction policy could also jeopardize the dollar’s supremacy in the longer term.
Source: BusinessAM
–
