05
July
2024
The debate about the US dollar dominance flares up again and again when the United States decides on new sanctions against Russia. Most recently, this was the case when the US administration on the 12th. June imposed punitive measures against the Moscow Stock Exchange, the Russian payment processor NSD (National Settlement Depository) and the Russian clearing house NCC (National Clearing Centre). The stock exchange was immediately forced to suspend its trading in US dollars as well as euros. Although currency transactions in Russia are still possible, they must now be settled through banks that are not subject to sanctions. In addition to some Russian financial institutions, these are banks from Western countries that - such as Raiffeisen or Unicredit - have not yet withdrawn from Russia. 1] Observers classified the measures ambivalently. So it was said that they would noticeably increase the costs for Russian exporters as well as the prices for Russian imports and thus burden Russian citizens who buy foreign goods even more than before. On the other hand, they would further complicate the outflow of Russian capital and thus indirectly - and probably unintentionally - fuel the Russian economy. 2]
Above all, however, the sanctions - even the unintentional - benefit the Chinese currency, the yuan. In May, the yuan in Russia had already risen to the most traded currency and had reached a share of 53.6 percent of total stock exchange trading. After the imposition of punitive measures against the Moscow Stock Exchange, the NSD and the NCC, the yuan will become "one and for all the main currency" in Russian stock exchange trading, according to a recent analysis by the US Foundation Carnegie Endowment. 3] Although it must be expected that major Chinese banks that are involved in the international financial system will have to cut off all their relations with the newly sanctioned Russian authorities. However, similar difficulties had already existed before - and it has been shown that Moscow and Beijing have always found ways to circumvent the US criminal measures. This was done, for example, by using only regionally active banks in China, by the involvement of middlemen, for example in Kazakhstan or the United Arab Emirates, by using cryptocurrencies or also by means of a transition to barter transactions. Comparable things are also to be expected in the current case.
At the end of June, the GeoEconomics Center of the Washington Atlantic Council presented a study that examines the current development in US dollar dominance. The authors admit that the Western Russia sanctions have not only forced Moscow to move away from Western currencies, but also motivated the BRICS states to gradually turn away from the US dollar. China has succeeded in making progress with its payment system CIPS (Cross-Border Interbank Payment System); CIPS is currently still dependent on the payment system SWIFT based in Belgium, but has the potential to replace SWIFT in the long term. It has increased the number of its direct participants by 78 percent to 142 from May 2023 to May 2024 and also has around 1,400 indirect participants. Negotiations on a BRICS payment system, on the other hand, are progressing slowly. 4] The share of the yuan in the global currency reserves, on the other hand, has decreased from its previous high - 2.8 percent in 2022 - and is only 2.3 percent, which is probably due to the weakening of the Chinese economy and, above all, to the conflict over Taiwan. An end to the dominance of the US dollar is not in sight, at least in the short and medium term.
Other analyses put this finding into perspective. Although it is widely agreed that the strict capital controls imposed by the People's Republic have restricted the international use of the yuan. However, Beijing has long since begun to relax controls. 5] In addition, in addition to the yuan, other currencies are also gaining in importance, such as the Australian or the Canadian dollar. According to an analysis recently published by the International Monetary Fund (IMF), the share of so-called non-traditional currencies in currency reserves worldwide has risen from a share of about two percent in 2000 to more than eleven percent in 2022, while the share of the US dollar fell from more than 70 to less than 60 percent - with a further downward trend. 6] In addition, China is gradually switching to yuan in foreign trade; if it still handled its cross-border trade in 2010 to 84.3 percent in US dollars and only 0.3 percent in yuan, the dollar share in March 2024 was only 42.8 percent, but the yuan share was already at 52.9 percent - with a further rising trend. 7] The BRICS also strive to process their trade in national currencies.
If the battle for US dollar dominance is still in full swing and is exacerbated by the US sanctions against Russia and other states, the euro is already recording clear losses. Not only his share in global foreign exchange transactions is gradually declining. 8] The share of the euro in foreign exchange reserves worldwide is also shrinking. Last year alone, as the European Central Bank (ECB) recently announced, it fell by five percent. This is also remarkable because the ECB has been warning for some time that the fact that the EU has frozen assets of the Russian Central Bank worth a good 210 billion euros and now wants to expropriate the interest income from it and let Ukraine benefit Ukraine will have a deterrent effect on investors and lead to a withdrawal from the euro. If the share of the euro in the currency reserves worldwide was still around 25 percent two decades ago, it has already fallen to 20 percent anyway and could continue to crash - especially if the EU should decide to completely confiscate the 210 billion euros of Russian assets, as some demand. 9] It might be a Pyrrhic victory.
[1], [2] Katharina Wagner: No more trading in dollars and euros on the Moscow Stock Exchange. faz.net 13.06.2024.
[3] Alexandra Prokopenko: How the Latest Sanctions Will Impact Russia - and the World. carnegieendowment.org 20.06.2024.
[4] Andrea Shalal: US dollar's dominance secure, BRICS see no progress on de-dollarization – report. reuters.com 25.06.2024.
[5] Hanns Günther Hilpert: China's monetary policy offensive. swp-berlin.org 07.03.2024. S. also The fight against dollar dominance.
[6] Serkan Arslanalp, Barry Eichengreen, Chima Simpson-Bell: Dollar Dominance in the International Reserve System: An Update. imf.org 11.06.2024.
[7], [8] The Start of De-Dollarization: China's Move Away From The USD. oilprice.com 26.05.2024.
[9] Martin Arnold: ECB flags euro risks from Russia as global forex reserves dip. ft.com 12.06.2024.