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China and Russia are collaborating to reduce their dependence on the US dollar. USD trade settlements between the two countries fell below 50% for the first time.

Dedollarization in Russia and China

The dollar’s share of trade between Russia and China was just 46% of settlements in the first quarter, the Financial Times reported on Monday, citing recent data from Russia’s central bank and the Federal Customs Service. It was the first time that the use of the US dollar for trade settlement fell below 50%. The euro, on the other hand, made up 30% of all settlements and national currencies 24% – both are all-time highs.

Since the establishment of the Bretton Woods system, the US dollar has been used as a medium for international trade. However, in recent years, a number of countries, including some G20 countries, have switched to trading in national currencies.

Russia and China have been trying for several years to reduce their use of the US dollar in trade settlements. In 2015, around 90% of their bilateral transactions were conducted in USD, but this figure fell to 51% last year, the publication continues.

Alexey Maslov, director of the Institute of Far Eastern Studies at the Russian Academy of Sciences, told the Nikkei Asian Review that Russian-Chinese “de-dollarization” was approaching a “decisive moment”. He believes it could elevate the two countries’ relationship to a de facto alliance. “Many expected it to be a military alliance or a business alliance,” the director explained. “But now the alliance is moving more in the banking and financial direction, and that’s what can guarantee the independence of the two countries.”

ING Bank’s chief economist for Russia, Dmitry Dolgin, reportedly said:

Any telegraph transaction that takes place in the world involving US dollars is at some point cleared by a US bank. This means that the US government can tell that bank to freeze certain transactions.

The Swift system, which has traditionally been used for trade settlement, is majority controlled by the United States, so many countries are trying to build their own alternative payment systems. For example, China launched a cross-border interbank payment system in 2015.

“Global de-dollarization policies include a sharp reduction in holdings of US debt, abandoning the status of the US dollar as an anchor currency, increasing trade in bulk commodities other than the dollar, increasing the reserve of currencies other than the dollar and increasing the hedging of gold against the dollar”, Wang Wen, professor and executive dean of the Chongyang Institute of Financial Studies of Renmin University of China, explained in an article he wrote in Global Times.

Zhang Xin, a researcher at the Center for Russian Studies at East China Normal University in Shanghai, noted that the Chinese government and major economic entities have recently begun to fear that they will find themselves in a situation similar to that of China. their Russian counterparts. They fear becoming “the target” of sanctions and “potentially even being barred from the Swift system”, he explained.

Russia has accumulated renminbi reserves at the expense of the US dollar, the publication said. The Bank of Russia revealed early last year that it had reduced its dollar holdings by $101 billion, which was more than half of its existing dollar assets. The central bank then increased the renminbi’s share of Russia’s foreign exchange reserves from 5% to 15% by investing $44 billion in the Chinese currency.

What do you think of Russia and China reducing their dependence on the dollar? Let us know in the comments section below.

Kevin Helms

An economics student from Austria, Kevin discovered Bitcoin in 2011 and has been an evangelist ever since. His interests include Bitcoin security, open source systems, network effects, and the intersection between economics and cryptography.

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