De-Dollarization Efforts in China and Russia
July 23, 2021
De-Dollarization Efforts in China and Russia
For more than a decade, China and Russia have sought to
connection programs that denominate some trade and
reduce their use of the U.S. dollar, or “de-dollarize” their
investments in RMB. At the urging of the Chinese
economies, in an effort to shield their economies from U.S.
government, the International Monetary Fund added the
sanctions, reduce exposure to the effects of U.S. economic
RMB to its benchmark basket of key international
and monetary policy, and assert global economic
currencies in 2016.
leadership. While China and Russia have somewhat
Despite these efforts, the dollar remains important to China
reduced their dollar use, both countries, as do most
and its global economic position. China holds 50%-60% of
countries, still rely heavily on the dollar. China holds
its foreign exchange reserves in dollar-denominated assets
significant dollar reserves, and does not allow its currency,
and conducted an estimated 20% of its trade in 2020 in
the renminbi (RMB), to be traded freely in foreign
RMB. The United States is a top export market for China.
exchange markets. This limits the RMB’s use in cross-
China also requires payment in dollars for most exports and
border transactions and has constrained China’s broader de-
One Belt, One Road projects. The PBOC controls the
dollarization efforts. Russia’s ruble is not widely used
RMB’s value based on a basket of currencies weighted
abroad, and global energy markets (Russia’s main exports)
toward the dollar. Central banks globally hold 2% of their
are traditionally denominated in dollars. Over time,
foreign reserves in RMB.
however, if de-dollarization efforts gain traction, there
could be implications for the U.S. economy, U.S. sanctions,
China is also seeking influence in dollar-centered global
and U.S. global economic leadership.
payments infrastructure. In January 2021, China’s central
bank, the People’s Bank of China (PBOC), announced a
The Global Role of the U.S. Dollar
joint venture (JV) with the Belgium-based financial
The dol ar has served as the world’s dominant reserve
messaging service, the Society for Worldwide Interbank
currency since World War II. A reserve currency is a
Financial Telecommunications (SWIFT). SWIFT is relied
currency held by central banks in significant quantities. It is
on globally to send messages that facilitate cross-border
also widely used in international trade and investment
financial transactions. The JV plans to create a data center
transactions. Today, the dol ar remains the primary currency
and localized network in China that connects to the main
used in cross-border transactions, held by central banks in
SWIFT network and allows the Chinese government to
reserves, and traded in foreign exchange markets. The role of
monitor and control cross-border payments. Other
the dol ar reflects global confidence in the U.S. Federal
shareholders are two PBOC-affiliated groups that handle
Reserve (Fed) as an institution and the U.S. economy and
cross-border RMB clearing and settlement services for
financial markets more generally.
banking and non-banking institutions.
The dol ar’s global role also reflects continued U.S. global
De-Dollarization through Digital Currency?
economic and financial leadership. The Fed has consistently
China’s current de-dollarization efforts prioritize PBOC’s
demonstrated its capacity and wil ingness to bear the costs of
development of a digital currency. This initiative involves
backing up the global financial system, particularly during
developing a domestic payment system that could be used
crises. Most recently, the Fed’s actions to provide dol ar
globally, and advances China’s efforts to create alternatives
liquidity to the global economy stabilized international
to U.S.-controlled global economic, financial, trade, and
markets during the COVID-19 pandemic.
technology networks. The effort aligns with China’s
The dominance of the U.S. dol ar in cross-border transactions
buildout of its national security economic authorities,
allows the United States unique visibility and levers of
including new export controls and sanctions laws.
influence through policy measures such as financial sanctions
that impede access to the U.S. financial system or use of the
The Chinese government is piloting domestic deployment
U.S. dol ar in international trade. Sanctions, imposed for
with a focus on retail transactions as well as cross-border
foreign policy or national security objectives, restrict access to
trade with Hong Kong, Thailand and the United Arab
the U.S. payments and financial system, which is generally
Emirates. Relatedly, China is piloting the joint use of
needed to process dol ar transactions.
foreign exchange and RMB in companies’ cash
management and as cross-border financing for technology
firms in designated zones. Ahead of the release of PBOC’s
China’s De-Dollarization Efforts
digital currency, the government has shuttered private
China has tried for some time to de-dollarize in trade and
bitcoin operations and tightened operating terms for
investment with some limited success. The Chinese
financial technology service providers, such as Alibaba and
government has pressed trading partners, including with
Tencent. These firms are among a small group that PBOC
Russia, to denominate some trade in RMB; established
has entrusted to distribute its digital currency.
RMB trading centers in Hong Kong, Singapore, and
Europe; and created cross-border stock exchange
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De-Dollarization Efforts in China and Russia
China’s efforts to develop an alternative currency and
payment processing companies denied services to several
financial network may not immediately challenge the global
Russian banks subject to U.S. sanctions. Russia also created
role of the dollar due to the lack of full RMB convertibility,
its own financial messaging system—the System for
hesitancy of other central banks to use a digital currency,
Transfer of Financial Messages (SPFS)—after the United
long-standing international acceptance of reliance on the
States called for Russian banks to be disconnected from
U.S. dollar in particular sectors (oil and gas, for example),
SWIFT. Russia has expanded the use of Mir and SFPS
and national security concerns in other countries. Over
abroad: Mir has been introduced in Armenia, Turkey, and
time, however, a Chinese central bank digital currency and
Uzbekistan, and 23 banks outside of Russia are connected
accompanying global payments network could offer China
to SFPS. Russia’s central bank is also exploring the creation
alternatives to the U.S. dollar and workarounds to U.S.
of a digital currency, which would further reduce Russia’s
sanctions, at least in certain instances. Collaboration with
reliance on western (and dollar-centered) payments
Russia or others could facilitate certain trade within closed
infrastructure.
networks.
Despite these initiatives, President Putin acknowledged that
China is already using its digital currency to propose global
Russia would not be able to completely de-dollarize,
financial rules. At the Bank for International Settlements
referring to the dollar as a “universal currency.” Russia’s
Innovation Summit in March 2021, China submitted a
central bank governor also affirmed that the bank would
Global Sovereign Digital Currency Governance proposal
continue to hold dollar denominated-assets.
that shares its views for standards on cross-border digital
transactions, risk supervision, and data. At the event, the
Figure 1. Russia’s Exports to BRICS Countries
director of PBOC’s Digital Currency Research Institute said
that PBOC aims to become the first major central bank to
issue a sovereign digital currency to propel RMB
internationalization and reduce dependence on the dollar.
China’s payments network could give China greater
understanding and control of certain global financial flows.
Russia’s De-dollarization Efforts
The Russian government accelerated its de-dollarization in
2014, when the United States imposed sanctions on Russia
in response to Russia’s invasion of Ukraine. Over the next
several years, the United States expanded sanctions on
Russia for a variety of malign actions, including U.S.
election interference. Russian President Vladimir Putin
called for de-dollarization to insulate the Russian economy
from existing and potential future U.S. sanctions.
Source: Bank of Russia.
Russia has focused de-dollarization efforts in three areas.
Outlook and Policy Issues for Congress
First, the Russian government reduced its own holdings of
China and Russia’s multi-year, multi-pronged efforts to de-
dollars. Russia’s central bank cut the share of its reserves
dollarize have yielded minimal changes to date. However, if
denominated in dollars by more than half between 2013 and
they are able to more significantly reduce their use of the
2020. In July 2021, the Russian finance minister announced
dollar in the future, for example by expanding non-dollar
plans to completely remove from the country’s sovereign
trade or developing a digital currency, there could be
wealth fund dollar-denominated assets, which accounted for
implications for the United States. The United States
about one-third of the $186 billion fund.
benefits from the dollar’s global status, by lowering the
Second, Russia has reduced its share of trade conducted in
borrowing costs for the U.S. government and providing the
dollars. The government has concluded various discussions
United States with foreign policy leverage.
and agreements with a number of countries—including
Policy questions Congress may want to consider include:
China, India, Turkey, and other members of the Eurasian
What factors might make de-dollarization by Russia and
Economic Union (Armenia, Belarus, Kazakhstan, and
China more successful in the future? What are the key
Kyrgyzstan)—to prioritize the use of national currencies in
signposts that the dollar’s global role might be at risk?
bilateral trade. Russia’s major state-owned energy
companies also began transacting in euros and rubles where
Are there legislative actions that could re-inforce the
possible. These initiatives have shifted the currency-
dollar as the key international currency? How do various
composition of Russia’s trade. In Q4 2020, about 10% of
legislative efforts impact the dollar’s role, if at all?
Russia’s exports to other BRICS countries (Brazil, India,
Should Congress direct the Fed to create a digital
China, and South Africa) were invoiced in U.S. dollars,
currency, in order to maintain competitiveness and
down from about 95% in 2013 (Figure 1). About half of
desirability of the U.S. dollar?
Russia’s total exports, however, are still invoiced in dollars.
Should Congress require the Treasury Department to
produce an annual report on the use of the dollar
Third, Russia has developed its payment processing
international economy? If so, should this report discuss
capabilities to reduce its reliance on the existing, dollar-
the use of sanctions and the role of the dollar?
centered payments infrastructure. Russia created a new
national electronic payments system, Mir (which means
Rebecca M. Nelson, Specialist in International Trade and
“peace” and “world” in Russian), in 2015 after U.S.-based
Finance
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De-Dollarization Efforts in China and Russia
IF11885
Karen M. Sutter, Specialist in Asian Trade and Finance
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https://crsreports.congress.gov | IF11885 · VERSION 1 · NEW