Russian companies will make bypassing the U.S. dollar in international transactions a top priority, the heads of three Russian banks said this week, in the latest sign that Russia is turning its back on the West and moving toward Asia.
Sanctions imposed by the U.S. and European Union after Russia annexed Ukraine’s Crimea peninsula in March have spurred Western banks to drastically reduce their lending activity in Russia in recent months. Concerned the Russian economy was too reliant on the U.S. dollar and therefore vulnerable to Western political opprobrium, Russian politicians have called for a de-dollarization of their economy, underpinning a desire for greater independence from U.S. and European financial markets.
“Over the last few weeks there has been a significant interest in the market from large Russian corporations to start using various products in [Chinese] renminbi and other Asian currencies and to set up accounts in Asian locations,” the head of Deutsche Bank in Russia, Pavel Teplukhin, told the Financial Times in an article published Monday.
“There is no reason why you have to settle trade you do with Japan in dollars,” another Russian head of a large European Bank told the Financial Times. “There is nothing wrong with Russia trying to reduce its dependency on the dollar; actually, it is an entirely reasonable thing to do.”
The comments come a couple weeks after Russia’s state VTB bank, the country’s second largest lender, signed a deal with Bank of China to pay each other in domestic currencies. Last week, the head of state-owned Gazprom, which supplies Europe with 30 percent of its natural gas supply, announced the oil company would shift “nine out of 10” payment contracts from dollars to euros, with the ultimate goal of transitioning those contracts to rubles of renminbi.
Together, the deals were viewed as a shot across the bow of U.S. financial hegemony, though their economic impact will be minimal.
But undercutting the dominance of the U.S. dollar as international reserve currency has long been an ambition of the world’s emerging economies, spearheaded by the BRICS nations — Brazil, Russia, India, China and South Africa.
Demand for the dollar, which has served as a safe and reliable reserve currency in international transactions for decades, has allowed the U.S. to borrow almost unlimited cash and spend beyond its means, which some economists say has afforded the United States an outsize influence on world affairs.
In the aftermath of the showdown over Ukraine, however, Russia has sought to wean itself off the dollar. Many Russian economists fear that another brash foreign policy venture — like the occupation of the Crimean peninsula — could have disastrous consequences for Russian markets.
In May, Visa and Mastercard nearly closed up shop in Russia after Moscow created a competitor national payment system, a move that was in line with Russia’s brazen dismissal of its need for economic ties with the U.S. But on Monday, Russia’s Central Bank offered Visa and Mastercard a better deal to keep operating in the country, and it now seems unlikely they will exit.
In the absence of a viable alternative, replacing the dollar has proved difficult. Most economists say Russia cannot possibly pursue the wholesale de-dollarization of its economy, which would be risky and costly.
“People use the U.S. dollar for a variety of reasons; most important is that no matter where you are in the world it’s relatively easy to get your hands on it,” said Mark Williams, chief Asian economist for London-based Capital Economics. “So the costs in using the U.S. dollar to settle trade and investment are lower than other currencies.”
Of course, even if Russia was able to avoid trading directly in dollars, it cannot fully isolate itself from the U.S. currency.
"What's important is not just the currency in which trade is conducted but also the currency composition of Russia's savings," said Rachel Ziemba, director of emerging markets at Roubini Economics in London. "Dollars and euros make up the bulk of the Central Bank's foreign exchange reserves, and Russian corporations borrow more in dollars. So this move to the renminbi would only modestly diversify savings."
But the bank chiefs’ comments nevertheless underline the role China’s renminbi could play if emerging economies do begin to decouple from the dollar. Many suspect China has designs on vaulting the renminbi to the status of international reserve currency, which it considers one of the trappings of a global power.
“Given the extent of our bilateral trade with China, developing the use of settlements in rubles and renminbi is a priority on the agenda, and so we are working on it now,” Andrei Kostin, chief executive of state-owned VTB bank, told Russian President Vladimir Putin at a recent briefing according to the FT.
"It looks like this is not just a blip, this is a trend," said Deutsche Bank’s Teplukhin.
Moscow has begun to hook its line to Beijing in other ways, too. In late May, Gazprom signed a 30-year natural gas supply deal valued at over $400 billion as Russia begins to shift its energy exports toward growing Asian markets. Putin and Chinese President Xi Jinping personally witnessed the signing of the deal.
Yet most economists are skeptical that the proliferation of Russia-China deals poses a threat to the U.S. dollar. While Chinese companies have increasingly embraced the Chinese currency in international transactions, particularly in their dealings with Russia, the rise of the renminbi as an alternative reserve currency is often overplayed, said Capital Economics' Williams.
“The true test is whether companies outside China will use it to deal with other companies outside China. At the moment, all deals involve someone in China — and that’s a big difference from a vehicle currency like the dollar.”