Will Russia succeed in internationalizing the ruble against the dominance of the dollar in international trade?

Since its annexation of Crimea in 2014, Russia has prominently sought to challenge “dollar hegemony”, as Moscow realizes the paramount importance of reducing its excessive reliance on the dollar in economic and commercial transactions with the world, in terms of protecting its monetary sovereignty. , and mitigate the risks of US and European sanctions on its economy, especially those that limit its access to the global financial system.

Moscow’s orientations in this regard crystallized again after the outbreak of the Ukraine war in February 2022, when the West tried to tighten the economic noose by imposing a wide-ranging series of sanctions aimed primarily at reinforcing its international isolation. Therefore, the Russian government has taken more serious measures to limit the use of the dollar in its international transactions, in exchange for increasing the use of the Russian ruble and other currencies. The latest of these steps was the announcement by the Russian group “Gazprom”, on September 6, 2022, that China would start paying for Russian gas shipments in rubles and yuan instead of dollars.

against the dollar

Russian efforts to reduce its economy’s exposure to the US dollar have focused on three main aspects, namely:

1- Reduce the share of the dollar in Russian cash reserves and replace it with the yuan and the euro, which is why the Russian Central Bank reduced the size of dollar-denominated cash reserves by more than half between 2013 and 2020. Meanwhile, the Russian Finance Minister announced, in July 2021, plans to permanently dispose of dollar-denominated assets in the investment portfolio of the Russian Sovereign Wealth Fund.

2- Reduce the share of the dollar in Russian trade with friendly countries, which led Moscow to conclude several agreements with several other governments to give priority to the use of local currencies in bilateral trade.

3- Reduce Moscow’s dependence on the infrastructure of the international payment system, since Russia has established a new national electronic payment system called “MIR”, and in recent years has launched a system for exchanging messages between banks called ” SPFS”, to function as an alternative to the global “Swift” system. .

Moscow moves:

There are a number of indicators that confirm the Russian plan to expand the use of the ruble in international trade, the most prominent of which are the following:

1- Reliance on local currencies in trade: Even before the outbreak of the current war in Ukraine, the Russian leadership sought to promote the principle of relying on local currencies in bilateral trade with other countries, driven by geopolitical competition with the United States, and in a way that resulted in a decrease in the share of local currencies in bilateral trade with other countries. The dollar in Russian trade increased from 67% in 2018 to 56% in 2020, and the share of the euro increased from 17% to 27%, and the ruble from 13.6% to 14.7% in the same period, according to estimates by the Russian Central Bank.

Furthermore, Russia has increased the share of the ruble in its trade relations with the Eurasian Economic Union from 54% in 2013 to 70% in 2019, according to The Russian Export Center.

With recent Western sanctions against Russia escalating, countries such as Armenia, Iran, and Turkey announced their intention to adopt a payment mechanism to allow the use of the Russian ruble in trade with Moscow; With the aim of strengthening their trade relations and circumventing Western sanctions against Russia.

2- Reduce the “petrodollar” phenomenon: Russia seeks to strengthen the ruble as the approved currency to settle international energy exchanges, and Moscow issued a decree in March 2022 to sell Russian gas and oil to “hostile countries”, according to the Russian expression , in rubles instead of the dollar and the euro, which is an essential condition for the continuation of gas contracts with these countries.

Under this mechanism, customers will open two bank accounts with Gazprombank, one in foreign currency and the other in Russian currency, as long as European gas importers deposit the euro in the foreign currency account, and Gazprom Bank will then convert those currencies into rubles. through the exchange market, and then sent to the gas importer’s account denominated in rubles. This mechanism grants discretion to the Russian authorities to set the price of gas, as well as to transfer the exchange rate risk to customers.

President Vladimir Putin has made good on his threats to stop gas flows to countries that refuse to comply with such a mechanism, such as Poland, Bulgaria, the Netherlands, Finland, Denmark and Latvia, which refused to pay in rubles for the gas, and this raised gas prices. to record levels, and exacerbated the energy crisis suffered by the European continent.

Aside from European customers, Moscow has also agreed with other major buyers of Russian gas, such as China and Turkey, to directly settle part of the export receivables payments in Chinese rubles and yuan, gradually leading Russia to settle foreign energy trade through currencies other than the dollar and the euro.

3- Seeking to include new currencies in the global monetary reserve: During the last years, Russia has tried to include its currency among the main currencies of the global monetary reserves, more than a decade ago it was proposed to diversify the list of currencies in the basket. drawing rights of the International Monetary Fund and the currencies of the global monetary reserve through The inclusion of the currencies of the BRICS countries, and in particular the ruble, within it. However, that proposal was rejected by the International Monetary Fund due to the inability of the Russian currency to meet the huge demand for foreign exchange.

Main reasons:

The reasons behind Moscow’s efforts to internationalize its currency, the “ruble” in international trade, are varied, which can be outlined as follows:

1- Supporting the value of the local currency: The Russian ruble lost around 70% of its value against the US dollar from the beginning of the Ukraine war until the beginning of last March, as its value decreased from around 80 rubles per dollar on February 23, 2022, to hit lows last March 7 at 139 rubles per dollar. But the situation did not continue in this decline, as the ruble managed to become the world’s best performing currency this year, registering better levels than before the war, reaching about 60.55 rubles per dollar.

The fall in the ruble exchange rate at the beginning of the Ukraine war is due to the sanctions imposed by Western countries on Moscow, in particular the freezing of the assets of the Russian Central Bank in the European Union and the United States, and the isolation of some Russian Banks of the global system “Swift”. But Russian authorities soon took sweeping steps to support their currency, including deciding to sell gas in rubles and peg the ruble to gold; With the aim of emphasizing Russia’s position as a great power that has the ability to influence the world financial system.

2- Faced with Western sanctions: the United States used the dollar as a weapon in response to Russian military operations on Ukrainian lands; By imposing a package of economic sanctions aimed at undermining Moscow’s ability to access foreign currency, especially the dollar, prompting Putin to seek solutions and tools to deal with Western sanctions and reduce their impact on the Russian economy. In this sense, the internationalization of the ruble is seen as one of the tools available to the Russian leadership to circumvent these sanctions and mitigate their negative repercussions.

3- Guarantee the continuous settlement of commercial transactions: Russia’s tendency to increase the dependence on local currencies in its bilateral trade with its partners reflects its effort to facilitate the movement of its exports and imports and facilitate its economic and commercial transactions with the rest of the world. , amid US-led Western sanctions against Moscow. This enhances Russia’s balance of payments stability and undermines America’s ability to use the global financial system to achieve its political goals.

Determinants of success:

Russia’s success in the ruble internationalization policy, which it has been trying to promote for years, depends on a number of important determinants, and they can be clarified through the following points:

1- The position of the ruble as a global reserve currency: Despite Russia’s tireless efforts to diversify the basket of currencies in the global monetary reserve, its local currency “the ruble” was unable to occupy a significant proportion of the global reserves of currencies until the quarter ending March 2022. Even if the countries’ purchases increased Moscow’s friend of the ruble in the future, this does not mean that it will become the main reserve currency of the central banks of those countries.

The following figure shows that the ruble has not become a world reserve currency so far, as it shows that the dollar holds about 58.88% of world reserves as of the first quarter of this year, compared to more 70% in the late 1990s, and Compared to the euro’s share of around 20.06%, the Japanese yen is third at 6.36%.

2- The contribution of the ruble to the international payment system: the Russian ruble represents a small percentage in international payments, since it was used in only about 0.2% of the total payments made through the “SWIFT” system until December of 2021, which places it 20th among global currencies. It is preceded by the Danish krone, the Polish zloty and the South African rand.

3- The extent to which the ruble is considered a currency with a selective or international purpose: The agreements that Russia concludes with the countries that are commercially related to it for the use of local currencies in their bilateral transactions, only mean that the The ruble it can be used on a limited scale only between the countries of interest and is therefore not meant to be internationalized in international business transactions to which Russia is not a party. This is evidenced by the increased share of the ruble in bilateral trade with its trading partners such as China, in contrast to its decreased share in world trade and international reserves.

To conclude from the above, the ruble will not be able to become an international currency in the near future; However, given its inability to compete with the dominant currencies in the world economy, especially the US dollar, the escalation of US sanctions against some countries and the use of the dollar as a weapon in this regard may motivate many countries to follow the example of Russia. steps with respect to reducing exposure to the dollar, and in a manner that supports the emergence of a global financial system based on various base currencies.

Future Center for Research and Advanced Studies