In the face of numerous financial sanctions against Russia for its invasion of Ukraine, President Vladimir Putin reached a trade agreement with Xi Jinping to facilitate the flow of transactions between countries.
The measures are intended to erode the hegemony of the US dollar globally, but the truth is that they may still be modest in scope for these purposes.
Russia officially announced that it would adopt the Chinese yuan as the medium of exchange for its foreign trade with China and as the currency to trade with various countries in Africa, Asia, and Latin America.
These transactions were virtually paralyzed by Western restrictions and the exclusion of Russia from the SWIFT system, so it is now intended to replace the dollar as a commercial instrument.
The Chinese regime also committed to absorbing more exports from Russia, especially those related to the energy sector, through constructing the Siberia 2 oil pipeline.
The project aims to connect the exploitation of hydrocarbons from Siberia to the northwest of China with an infrastructure project of more than 2,600 kilometers.
Western sanctions significantly boosted the weight of the Chinese yuan in the Russian economy.
Payments made in yuan on the country’s current account have soared by 32% since the war in Ukraine, while trading in yuan on the Moscow stock exchange has risen from 3% to 33% in the last year.
Likewise, the volume of transactions carried out in euros and dollars increased by 24% and 54%, respectively, based on Russian foreign trade.
The Putin government intends to replace demand from its former European partners with new, unconventional markets.
However, although the Russian economy suffered substantially less than expected from the sanctions, the fact is that economic activity has accumulated ten consecutive year-on-year declines since April 2022.
IS THE HEGEMONY OF THE DOLLAR UNDER THREAT?
Although one of the objectives of the trade agreement between Russia and China is undoubtedly to damage the dollar’s hegemony, it does not affect the dollar’s main virtue as an international currency: its almost undisputed use as a reserve currency.
The measures adopted by Putin affect the use of the dollar as a medium of exchange in certain commercial transactions.
Still, they do not provide better incentives for hoarding yuan or rubles.
If the dollar is usually adopted as a transactional exchange currency worldwide, it is only because of its value as a reserve medium and not the other way around.
Historically, neither the ruble nor the yuan has been a popularly stable currency relative to the dollar or the euro.
This fact obscures an eventual “replacement” of the hegemony of the US currency at the global level.
There is another major impediment to an eventual hegemony of the Chinese yuan, and that is the Chinese regime.
The communist regime refused to fulfill its promises to dismantle its capital controls, even though it gained access to the World Trade Organization (WTO) in 2000 by promising precisely this path.
Since China does not allow the free entry and exit of the yuan from its country, its currency is not perfectly convertible as is the dollar or the euro.
Therefore, if a foreign agent deliberately decided to adopt the Chinese currency as a means of the reserve, he would find himself faced with the impediment of not being able to use it for a large number of transactions freely.
Just as the United States has done since the postwar period, China should adopt orthodox rules of the game in the capital market if it genuinely intends to dispute the rivalry with the dollar as the world’s reserve medium.
But this does not seem to be a priority on Xi Jinping’s agenda.
With information from La Derecha Diario