Russia, China and a number of other countries are aiming to cut their dependence on the US dollar, as Washington uses access to the dollar payment system as a weapon to punish nations and individuals for breaking US laws, even outside the United States.
In November, Russian Finance Minister Anton Siluanov said that Moscow and Beijing were finalising a memorandum to settle more bilateral trade in the rouble and yuan.
The two countries were also reportedly in talks to launch a new cross-border system to improve direct payments of trade invoices, and for the use of China’s UnionPay credit card in Russia and Russia’s Mir card in China.
But late last month, Russian media quoted Siluanov as saying that Moscow had decided to step away from Beijing’s proposed plan.
Talks would continue between the two countries’ central banks, as well as between Russia’s Ministry of Finance and China’s Ministry of Commerce, the reports said, without offering details of the plan.
Given the growth in Russia-China trade and their opposition to US sanctions via the dollar payment system, Beijing and Moscow were likely to keep working towards a system acceptable to both sides, analysts said.
Like a growing number of countries, China and Russia are keen to work out an alternative to protect their banks and bankrollers from the US’ secondary sanction power of prosecuting entities that deal with sanctioned companies or individuals from Russia, Iran or Venezuela.
But other nations, such as India, aim to enter a bilateral arrangement to cut their ballooning trade deficit with China. It’s no easy task though – just before the deal with Moscow was put on hold, Beijing rejected an Indian proposal for a rupee-yuan transaction system.
The US dollar is the preferred currency for international trade because it is one of the least volatile and thus less prone to a sudden depreciation.
The setback for the new payments infrastructure shows just how difficult it is to shift away from the US-dominated status quo.
Evghenia Sleptsova, senior emerging market economist at Oxford Economics, said that the greater stability of the yuan over the rouble was a plus for Russian exporters and a minus for Chinese exporters, who had no incentive to add currency risks to an already volatile commodity.
And while China’s “Belt and Road Initiative” and the Eurasian Economic Union are forging economic ties between the two countries, China is fast replacing Russia as a dominant economic power in the region, which might make Russia reluctant to accept Chinese financing and projects, according to Otilia Dhand, senior vice-president at the intelligence division of Teneo, a management consultancy.
Still, the role of the yuan and the rouble in Russia’s financial and trade transactions has grown in the last few years, and the strategic partnership with China will continue to deepen, especially if the US remains in an adversarial position to both, according to Dolgin.
That growth has been aided by China setting up a “payment versus payment” (PVP) system for yuan-rouble transactions in 2017, paving the way for China to use PVP systems for yuan transactions with other currencies along the belt and road route. The PVP systems reduce settlement risk as well as the risk of transactions taking place in different time zones, and improve foreign exchange market efficiency.
In 2014, China and Russia signed 38 energy, trade and finance deals and a currency swap worth 150 billion yuan (US$22 billion). Russia had sought trade links with China after its forceful annexation of Crimea soured ties with the United States and European Union.
In bilateral trade with China, about 14 per cent of payments are already done in yuan, and about 7 to 8 per cent in the rouble, according to Russia’s Finance Ministry.
The Russian central bank is also buying yuan for its foreign reserves, purchasing $44 billion worth of the Chinese currency in the second quarter of 2018, while selling more than $100 billion of US dollars. Russia held US$67 billion in yuan as of mid-2018, 15 per cent of its international reserves.
China’s yuan has become the fourth largest component of Russia’s international reserves after the euro (32 per cent), the US dollar (22 per cent), and gold (17 per cent).
Russia wants to see bilateral trade with China top $200 billion by 2020.