Attempt to ‘De-Dollarize’ No threat to Greenback

  • Russia and China’s plans to challenge the dollar on the world stage are going nowhere, experts say.
  • Russia’s weak economy and China’s capital controls make their currencies less attractive.
  • It will take a long time for any significant challenge to be mounted against the US dollar, sources told Insider.

Russia’s attempts to challenge the supremacy of the US dollar are unlikely to work, experts say, even if the country joins China in a move to challenge the greenback with an alternative reserve currency.

After being targeted by western sanctions over its invasion of Ukraine, Russia has vowed to “de-dollarize” its economy, with measures including avoiding currencies from “unfriendly” countries and planning to create a new reserve currency in China to challenge the dollar’s position as the leading currency in global trade.

Last year, Russia announced that it would cooperate with other BRICS countries (Brazil, Russia, India, China, South Africa) to create an alternative reserve currency. However, those efforts to topple the greenback from its perch at the top of international markets are futile, experts say, and neither is the Russian ruble or any other move to develop a new or that reserve currency with China will lead to a significant challenge.

According to Jay Zagorsky, an economist from Boston University, one of the main problems of Russia is that its economy is tied to the dollar through its oil trade. Crude oil is one of Moscow’s main sources of income, and transactions are widely denominated in US currency.

Zagorsky doubts that Russia’s plans for a reserve currency in China and other countries will find much demand. Previous attempts to create a common reserve currency, such as the recent plans between Brazil and Argentina, have often failed, especially when the partner countries are in unequal economies.

“Russia is a weak economy and they are allowed a lot. They have a great amount of economic difficulty,” according to Bob Stark, the head of market strategy at Kyriba. “Does Russia want the US dollar to collapse? I sure do, but that’s not the conversation.”

The yuan is rising but challenges remain

The biggest player in all of this is China, which has struck a number of partnerships with other countries to boost its yuan’s presence on the world stage. Russia’s participation in those efforts is simply a survival tactic, a way to keep its economy afloat and keep trade flowing after being rebuffed by western sanctions.

“It’s not so much Russia trying to challenge the dominance of the dollar more than the rise of China as a world supereconomic power. It’s part of a larger Chinese strategy,” Stark said. He pointed to warnings from “Dr. Doom” economist Nouriel Roubini, who said a bipolar currency system could emerge in the next decade, where the yuan would compete with the dollar in global trade.

But while Stark thinks a yuan-vs-dollar regime is possible, he says that scenario is only a remote possibility. It takes a long time for a currency to be reliable and widely used in trade, and it will take a long time to topple the greenback, which has accounted for 96% of world trade in recent decades, according to data from the Federal Reserve. Meanwhile, the yuan accounted for only 2% of global trade in the first half of 2022.

Zagorsky rejected the idea that the dollar would be replaced by the yuan, because of China’s capital controls on its currency, such as limiting the amount of yuan that can be taken abroad. Until the rules are in place, that makes the yuan less liquid than currencies like the US dollar, and therefore less attractive.

“International investors and traders don’t want to use a currency if they’re worried that their money will be trapped inside a country and they won’t be able to move it,” he added.

A report from the Carnegie Endowment for International Peace says that the yuan is not a threat to the greenback, because the internationalization of the yuan requires dollar reserves to keep it stable. Nobel Prize-winning economist Paul Krugman added that he is not afraid that the US dollar will lose its dominant position, and even if it does, it will “not be very earth-shattering” for the US economy.

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