Russia has announced that it will phase out the use of the US Dollar for trade settlements by the end of 2024, as part of its efforts to reduce its dependence on the American currency and to counter the effects of US sanctions. This is a major development that could have significant implications for the global economy and geopolitics.
Why is Russia ditching the US Dollar?
Russia has been gradually reducing its exposure to the US Dollar since 2014, when it faced a series of sanctions from the US and its allies over its annexation of Crimea and its involvement in the conflict in eastern Ukraine. The sanctions targeted Russia’s energy, banking, defense, and other sectors, limiting its access to international financing and trade.
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In response, Russia adopted a policy of “de-dollarization”, which aimed to diversify its foreign exchange reserves, increase its use of other currencies such as the Euro, the Chinese Yuan, and its own Ruble, and promote bilateral and regional trade agreements that bypassed the US Dollar.
According to the Central Bank of Russia, the share of the US Dollar in Russia’s foreign exchange reserves fell from 46% in 2013 to 22% in 2020, while the share of the Euro rose from 24% to 32%, and the share of the Chinese Yuan rose from 1% to 12%. Russia’s motivation for de-dollarization is not only driven by sanctions, but also by a broader strategic vision of reducing its vulnerability to external shocks and increasing its economic sovereignty and security.
Russia views the US Dollar as a tool of American hegemony and influence, which can be used to exert pressure on other countries and interfere in their domestic affairs. By ditching the US Dollar, Russia hopes to weaken the US’s ability to impose sanctions and to challenge its global leadership.
What are the challenges for Russia?
While Russia has made significant progress in de-dollarizing its economy, it still faces several challenges and risks in achieving its goal. One of them is the inertia and preference for the US Dollar among its trading partners and investors.
The US Dollar remains the most widely used and accepted currency in international trade and finance, accounting for about 60% of global foreign exchange reserves, 40% of global payments, and 50% of global debt issuance. Many countries and businesses still prefer to use the US Dollar for convenience, stability, liquidity, and trust.
Another challenge is the potential backlash from the US and its allies, who may view Russia’s move as a threat to their interests and influence. The US may impose more sanctions on Russia or try to dissuade other countries from following its example.
The EU may also be concerned about Russia’s increasing reliance on the Euro, which could expose it to more volatility and political pressure from Moscow. Moreover, some countries may be reluctant to abandon the US Dollar for fear of losing access to the US market or facing retaliation from Washington.
A third challenge is the uncertainty and instability that may arise from a rapid shift away from the US Dollar. Such a shift could disrupt global trade and financial flows, create exchange rate fluctuations and inflationary pressures, and trigger a loss of confidence in the international monetary system.
It could also create coordination problems among countries that use different currencies or have diverging interests and preferences. For example, China may not share Russia’s enthusiasm for de-dollarization, as it benefits from maintaining a stable and cooperative relationship with the US.
What are the consequences for other countries and regions?
Russia’s decision to ditch the US Dollar could have significant consequences for other countries and regions, depending on their economic ties with Russia, their exposure to the US Dollar, and their geopolitical alignment with either Washington or Moscow. Here are some possible scenarios:
For China, Russia’s move could be seen as an opportunity to expand its economic cooperation and influence with Moscow, especially in areas such as energy, infrastructure, technology, and defense. China may also support Russia’s de-dollarization as part of its own efforts to internationalize its currency and challenge the US Dollar’s dominance.
However, China may also be cautious about aligning too closely with Russia or antagonizing the US too much, as it seeks to balance its interests and avoid a confrontation with Washington.
For Europe, Russia’s move could pose both challenges and opportunities. On one hand, Europe may face more pressure from Russia to use the Euro for trade settlements or risk losing access to Russian markets or resources. Europe may also face more volatility and uncertainty in its financial markets and exchange rates due to Russia’s de-dollarization.
On the other hand, Europe may benefit from increased demand for its currency and bonds from Russia and other countries that seek alternatives to the US Dollar. Europe may also have more leverage and influence over Russia in areas such as security, human rights, and climate change.
For the Middle East, Russia’s move could have mixed implications. Some countries, such as Iran, Syria, and Turkey, may welcome Russia’s de-dollarization as a way to reduce their dependence on the US and to strengthen their ties with Moscow. These countries may also follow Russia’s example and use other currencies for trade settlements or create their own regional payment systems.
Other countries, such as Saudi Arabia, the UAE, and Israel, may be wary of Russia’s de-dollarization as a threat to their strategic partnership with the US and to their stability and security in the region. These countries may also face more competition from Russia in the global energy market.
For the rest of the world, Russia’s move could have varying effects depending on their economic and political situation. Some countries, such as India, Brazil, and South Africa, may see Russia’s de-dollarization as an opportunity to diversify their foreign exchange reserves and trade partners, and to enhance their economic autonomy and resilience.
Other countries, such as Japan, Australia, and Canada, may see Russia’s de-dollarization as a challenge to their alliance with the US and to their role in the global economy and governance.