Russia and China have been working together to reduce their reliance on the US dollar for international trade and finance, a process known as dedollarization. This collaboration has led to the increased use of the Chinese yuan and gold as alternatives to the dominant currencies of the world. While these efforts have helped Russia weather the impact of Western sanctions in the short term, they have also created new vulnerabilities and risks.
Opportunities of Dedollarization
One of the main advantages of dedollarization for Russia is that it reduces its vulnerability to Western sanctions, as it can no longer be cut off from the international financial system by the US and its allies. The use of the yuan and gold also allows Russia to diversify its reserves and protect itself from fluctuations in the value of the dollar and euro. Additionally, increased trade with China helps Russia to reduce its dependence on the West and tap into new markets.
Risks of Dedollarization
However, dedollarization also poses several risks for Russia. One of the main vulnerabilities is the ruble-yuan exchange rate, which is tightly controlled by China and can be manipulated to Russia’s disadvantage. Chinese authorities can also impose capital controls on yuan outflows, which could prevent the Russian Central Bank from selling Chinese bonds and converting the proceeds to rubles. Furthermore, bilateral currency swap lines with China, which Russia relies on to build up its yuan reserves, expose Chinese financial institutions to US secondary sanctions for aiding Russia’s sanctions evasion efforts
Gold as an Alternative
In addition to the yuan, Russia has been turning to gold as an alternative to the dollar and euro. Its gold holdings have nearly tripled since 2014, with 150,000 gold bars valued at about $140 billion. Russia is also the world’s second-largest gold producer and has been selling excess gold to China at a discount of up to 30 percent. However, this illicit trade is risky and challenging to scale up, as potential partners are either deprived of dollars and euros themselves or not interested in mass purchases due to the heightened risk of exposure and Western retaliation.
Russia’s collaboration with China on dedollarization has both benefits and risks. While it has helped Russia reduce its vulnerability to Western sanctions and diversify its reserves, it has also created new vulnerabilities and risks. The increased use of the yuan and gold has made Russia more dependent on China, and its reliance on illicit gold trade exposes it to legal and reputational risks. As long as sanctions remain in place, Russia will have to navigate carefully to stay on the right side of Beijing and manage the risks of dedollarization.