MOSCOW – According to the latest data, in 2018 the Russian Central Bank increased its reserves in Chinese currency, while the share of the dollar fell twice. Why is Russia actively replacing dollar-denominated assets with other yuan-denominated assets and how is the rest of the world preparing to weaken the dollar’s role?
In the last year the Russian Central Bank increased its reserves denominated in yuan by 17 times. In the third quarter of 2018, the share of the Chinese currency in the Bank of Russia portfolio increased from 11.6% to 13.6%, to US$62.5 billion, while US securities fell from 46% 2% to 22.6%.
But what is behind these actions of the Russian Central Bank? First, it is noteworthy the increase in bilateral trade between Russia and China amid Washington’s attempts to impose its own rules.
Last year the volume of Russian-Chinese trade increased 27.1%, surpassing 100 billion dollars.
By 2019 this growth could become even more remarkable due to the US-China trade war, which forced Beijing to give up American goods and seek replacement in other countries, including Russia.
In the context of increased trade between the two countries, it is logical that the Central Bank of Russia is increasing the share of the yuan in its reserves. Not surprisingly, the two countries are trying to abandon the dollar in mutual transactions.
In addition, a number of Russian banks have already joined the China International Payment System (CIPS) to expand the use of national currencies in international transactions. Russia, in turn, has created its own analogue to the SWIFT interbank payment system, whose export version was presented at the end of 2018.
Europe is also preparing to abandon the use of the dollar. On March 31 the European Commission concluded the collection of expert opinions and the positions of EU countries regarding the use of the euro instead of the dollar in payments for energy sources.
This initiative was proposed in December by European Commissioner for Global Warming and Energy, Miguel Arias Cañete.
“The EU imports 34% of energy from Russia, 33% from the Middle East and North Africa, 20% from Norway, 2% from the US, but 85% from import contracts are denominated in dollars,” said Cañete.
This creates currency risks for European energy companies and could lead to payment problems between European countries and their partners if the US adopts sanctions against them.
After examining all opinions, the European Commission should develop recommendations for the phasing out of the use of the dollar, for example the so-called Trade Support Facility (INSTEX) developed by Germany, France and the United Kingdom to avoid sanctions INSTEX predicts that payments for oil and other goods imported from Iran will be credited to the account of a special company. The same company will buy goods and services in Europe and then send them to Tehran.
INSTEX is based on the principle of anonymity: this special company will not disclose its partners in Europe, which will protect them from US sanctions. In addition, the INSTEX system will not use the dollar so that the US Treasury can not track its movement.
According to Reuters, in early May Washington plans to take tougher sanctions on Iran by reducing the list of countries (excluding Greece and Italy, for example) allowed to buy Iranian oil without being affected by US restrictive measures, for example. If this happens, even more European countries will join the INSTEX mechanism, abandoning the dollar.