Since 2014, China and Russia have sought to drastically reduce their reliance on the U.S. dollar to mitigate the impact of any U.S. coercive economic action against them. The two countries want to create a new alternative financial system outside the oversight of the United States, which has jurisdiction – and power – linked to every user of dollars in the world. Nonetheless, the deck is stacked against Russia and China’s goal.
Notwithstanding their progress in de-dollarizing bilateral trade, China and Russia are unlikely to succeed in building a global de-dollarized coalition to avoid sanctions. This is because the U.S. dollar has the incumbent advantage in facilitating global trade. The dollar is also more stable than the Chinese renminbi (RMB) and Russian ruble, and China-Russia relations are not as strong as they appear.
Their efforts are not new. China and Russia have long sought to avoid the impact of U.S.-imposed sanctions and weaken the dollar. This is so they can decrease the negative effects of any sanctions, which get their bite from use of the ubiquitous dollar, that might be levied against them. The two countries also want to be able to trade with actors that have had sanctions imposed against them by the United States.
Yet, suggesting that a de-dollarized China-Russia financial alliance could form the basis of an alternative financial system is an exaggeration. The dollar has had the incumbent advantage in conducting global trade for decades. This has extended to central banks’ reserve currencies. As of 2020, 62 percent of central banks’ reserve currencies are held in the dollar, resulting in the dollar’s self-sustaining prevalence. Most trading entities already have a supply of dollars, and it would cost more for most actors to switch to another global currency.
Notably, the dollar demonstrated its adaptability when the euro was first released. That alternative currency did not rock the dollar boat. While there was an initial dip in the proportion of dollar-based exchanges, the proportion of dollar-based trade returned to an equilibrium within a few years. This dynamic remains constant even after the European Central Bank’s campaigns to encourage the use of the euro as a reserve currency.
Although China and Russia have faced growing sanctions from the United States, their hostility to the dollar is not shared by many of their trade partners. Unless pressured, few of Beijing and Moscow’s trade partners would try to decrease their own dollar-based trade, as these partners would be restricting their own trade outreach, exposing themselves to greater currency volatility, and building up harder to use and exchange currencies.
The interventionist monetary policies and weak property rights in both China and Russia are further barriers for their adoption in trade and for reserves. For example, when the People’s Bank of China (PBoC) removed some of its control over the RMB’s value in 2015, the RMB’s value fluctuated significantly, forcing the PBoC to quickly reimpose control.
The incident has since made investors wary of conducting RMB-based exchanges. Additionally, no currency under strict central bank oversight has had widespread internationalization as foreign investors remain cautious of building currency reserves they may later lose control over.
Finally, China-Russia relations are not warm, despite sharing a common interest in restricting U.S. influence. While China bought a record amount of oil from Russia and they recently conducted military exercises together, such cooperation is ad hoc. This is not a strong enough bond to offer up the fiscal stability they need.
Furthermore, the Kremlin has concerns with growing Chinese influence in Central Asia, which it views as part of its traditional sphere of influence. While China-Russia trade has become less reliant on the dollar, it remains primarily restricted to raw materials and military equipment. Despite the record oil exports, Russia is against expanding trade with China on other products due to China’s relative economic strength.
So, if China and Russia form a financial alliance, Russia knows it will be a junior partner in a primarily anti-U.S. coalition. If it feels China is becoming a greater threat, Russia may be more likely to pivot against Chinese influence, left out on a limb in a competitive world.
Ultimately, there are many barriers to expanding a de-dollarized China-Russia financial alliance. Global exchanges appear poised to continue to favor the dollar’s widespread usage, relative stability, and lack of currency controls. A China-Russia financial alliance is not likely to dethrone dollar hegemony anytime soon.
Francis Shin is a researcher in the CNAS Energy, Economics, and Security program.