Russia and China strengthen their currencies by eliminating more dollar trading

Russia and China strengthen their currencies by eliminating more dollar trading

Moscow and Beijing are seeking to mitigate the impact of the fluctuation of the dollar on their economies, and its share in Russian exports to China drops to about 40% after it was 100% in 2013.
Once again, Russia and China have added a new step towards removing the US dollar from the two countries’ intra-trade payments, as part of efforts to mitigate the impact of dollar volatility on their economies.

This week, Russia’s Gazprom reported that it had signed an agreement to start converting payments for gas supplies to Beijing into yuan and rubles instead of dollars. The shift is part of a push by Russia to reduce its dependence on the dollar, the euro and other hard currencies in its banking and trade system, a drive that Moscow has accelerated since it was hit with Western sanctions in response to the war in Ukraine.

China is a major trading partner with Russia, and they have close economic ties. Indeed, Beijing has become Russia’s savior for the disposal of Moscow’s fossil energy exports.

China and Russia facilitated currency pair trading in their markets years ago, when both were seeking to reduce dependence on the US dollar. The Micex exchange in Moscow began trading the yuan against the ruble in 2010, the same year China allowed the couple to trade inside.

The dollar’s share of Russian exports to China has fallen to about 40% now from nearly 100% in 2013. While there is no accurate information available on the dollar’s and the euro’s share of Russian trade payments, experts at Bloomberg put the figure at 80%.

In theory, the decision of the two countries is good for their economies, facilitates calculations and becomes an example for other companies, and gives an additional impetus to remove the dollar from trade payments and current accounts as a whole.

The move comes after President Vladimir Putin, earlier this year, forced European customers to open ruble bank accounts with Gazprombank and pay in Russian currency if they wanted to continue receiving Russian gas.

The joint decision will maintain the abundance of foreign exchange, specifically the dollar, in the economic cycle of both countries, and will reduce their exit in the form of payments, but within certain ceilings.

According to the data of the World Trade Organization, the dollar constitutes about 85% of trade payments in the world, while the rest is distributed among the rest of the currencies, a percentage that shows the strength of the dollar as the main trade currency. The fluctuations of the dollar exchange rate may be under control, and acceptable to the parties to global trade, more than the fluctuations in the Russian and Chinese currencies.

The “strong” Russian ruble is still subject to fluctuations and attempts to weaken it, after it rose strongly against the dollar to a peak of more than 3 years, during earlier last June, at nearly 55 against the dollar. In the first week of last March, the ruble exchange rate fell to 150 against the dollar, before rebounding upwards due to measures led by the Russian Central Bank, compared to 76 rubles on the eve of the war.

The yuan is also experiencing fluctuations, but less than the Russian currency, which is an indication that trade payments may be made on the basis of fixed exchange rates throughout the period of the agreement between the two countries, so that countries are not exposed to exchange rate fluctuations.

In March 2018, the Russian Central Bank said that 14% of its foreign reserves were denominated in the Chinese yuan, but as of mid-2019, the yuan had lost 6.4% of its value, due to the trade war with Washington. While in 2020, the Russian Central Bank’s reserves denominated in yuan fell to 12% of total reserve assets, which is a vivid example of the effects of currency fluctuations.

At the end of 2020, the ratio of global reserves denominated in yuan at the International Monetary Fund amounted to 2.25%, compared to 56% for the dollar currency, as the huge size of the Chinese economy did not help increase the global image of its national currency.

China today, according to WTO data, represents 13.5% of global exports, and 11.4% of global imports, but the yuan represents only 1.7% of international settlements in 2021.

The global need for Russia, as a source of natural gas, crude oil and coal, makes the possibility of foreign exchange fluctuations out of the question, unless Moscow is subjected to US sanctions, such as those imposed on Iran.

On the ground and in the balance of power, Russia is not like Iran, as Moscow has a global power that makes the international need for it inevitable, because of energy. It accounts for 17% of global production.

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