Russia’s latest move towards ‘de-dollarization’ seen as symbolic

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In the Russian government’s latest move to reduce its reliance on a global financial system dominated by the United States and its allies, Kremlin officials on Monday launched a policy banning the use of U.S. dollars as collateral for trading on the Moscow Stock Exchange, Russia’s largest financial service. market.

Experts say the change was more symbolic than practical, as a broad list of sanctions imposed on Russia following its expanded invasion of Ukraine has made it nearly impossible for Russian companies to transact in dollars. The change comes just weeks after the Moscow Stock Exchange reduced the acceptable percentage of US dollars as collateral from 50% of the total value to 25%.

Still, the shift underscores Moscow’s efforts to chart a course through the maze of economic barriers built by the United States and its allies in the more than six months since the invasion began. Kremlin officials have called on Russian businesses and individuals to divest of “toxic” currencies issued by governments that have acted to thwart President Vladimir Putin’s efforts to expand Russian territory by force.

“The blocking of Russian assets by hostile countries, as well as operational restrictions on settlements in the world’s major reserve currencies, create risks for citizens and businesses when using the US dollar and the euro,” he said. said the Russian central bank in a statement released months ago.

Heavy penalties

In the days following the entry of Russian troops into Ukraine in February, the United States and its allies, including most countries of the European Union, Canada, Japan, Australia and almost all other major Western economies, began to apply unprecedented economic pressure in an attempt to roll back Putin. Classes.

Much of the Russian central bank’s assets held abroad have been frozen, as have the assets of many wealthy Russian businessmen. U.S. banks have been effectively barred from doing business with Russian companies, with a few exceptions for energy payments, which has resulted in Russian companies being cut off from dollar transactions that make up a significant portion of global trade.

Russian banks were eventually locked out of SWIFT, the global messaging network that international banks use to settle cross-border transactions, and export controls made it difficult for Russia to buy high-end electronics and hardware. other goods essential to the functioning of a modern economy in the 21st century.

Wrong assumptions

The Kremlin may have been surprised by the unity with which the United States and its allies acted. Experts said Russian leaders likely assumed it would be cut off from the dollar after invading Ukraine – indeed Russia has, for years, taken steps to insulate itself from the dollar.

However, the Kremlin did so on the assumption that other global currencies, primarily the euro, but also the Japanese yen and the pound sterling, would remain at its disposal.

“What is so important to understand about this is that Putin and Elvira Nabiullina, the central bank governor, really believed that it was okay to be less dependent on the dollar, because they could diversify. in euros and other currencies,” Josh Lipsky, the senior director of the Atlantic Council’s Geoeconomic Center, told VOA.
But the world’s seven major industrialized democracies, the G-7, remain firm on sanctions and have pledged solidarity with Ukraine.

“What surprised them was the unity within the G-7 – that the dollar and the euro and the yen and the pound were acting in tandem,” Lipsky said. “And it didn’t give them any other outlets.”

Other markets

While Russia has found itself largely barred from doing business with much of the world, a set of exceptions have been put in place to allow the Kremlin to continue selling energy products, primarily oil and gas. gas. These sales, spurred by months of abnormally high energy prices, have helped Russia avoid the worst potential consequences of its economic isolation.

At the same time, Russia has been working to develop alternatives to its traditional trade and financial flows. Turkey, whose leader Recep Tayyip Erdogan has positioned himself as an intermediary between Putin and Western leaders, agreed earlier this month to pay for Russian natural gas in roubles.

China and India, two major consumers of Russian energy, both increased their purchases in the months following the invasion, settling transactions in their national currencies rather than dollars, as is often the case. the case in world markets.

However, even Russian officials have conceded that creating a system completely independent of the dollar is not feasible.
Commenting on his country’s growing relations with China in June, Russian Ambassador to China Andrei Denisov said: “Complete de-dollarization is impossible in principle, and nobody sets this goal, given that the dollar is makes it a tool, an accounting currency, a means of international settlement and payment”.

Bad options

Jeffrey Mankoff, a distinguished scholar at the National Defense University and a nonresident senior fellow at the Center for Strategic and International Studies, told VOA that while Russia may be able to conduct certain transactions in currencies other than the dollar, the practice is “sub-optimal” at best, and the future looks bleak for the Russian economy.

“The problem is that there really isn’t a good alternative to the dollar at this point,” Mankoff said. “There’s no other currency that’s convertible to the extent that the dollar is and has a deep, liquid securities market, so you don’t take big exchange rate risks. doing business there.”

While using non-dollar currencies for settlement keeps cash in Russian vaults, he said: “The problem is that the money can’t really get out. Or, he can’t go out to buy the things Russia needs, which are restricted because of the sanctions.

Russia cannot import many of the consumer goods its citizens used to buy, which has eroded living standards. Additionally, Russia cannot import semiconductors and other high-tech components needed for domestic manufacturing operations.

Ultimately, Mankoff said, Russia’s options are extremely limited if it remains cut off from most global markets, and economic conditions are likely to deteriorate.

“Manufacturing, anything high-tech, including military goods, is going to get harder and harder,” Mankoff said. “If this war is still going on six months or 12 months or more from now, I think you’re going to see the impact of these restrictions increase over time.”

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