February 2023

Daring the dollar

Amit Agnihotri examines the flourishing China-Russia alliance, asthe two countries push the yuan to challenge the might of the US and its powerful currency

The China and Russia axis, which is based on their shared objective of countering US influence worldwide, is now trying to dent the dollar’s domination in global trade.

As 2022 drew to a close, separate moves made by Chinese President Xi Jinping and Russian President Vladimir Putin indicated that they want to initiate processes which will help their respective countries reduce dependence on the US dollar.

At a December conclave in Saudi Arabia, whichmarked the beginning of a new phase in China’s relations with the Arab world, President Xi said he wanted to make full use of the Shanghai Petroleum and Natural Gas Exchange to make payments for oil imports from West Asia in yuan instead of the US dollar.

China hopes to replace the US as the world’s largest economy but is heavily dependent on energy imports (over 70 percent of oil and over 40 percent of gas), for which it has to shell out dollars.

In West Asia, Saudi Arabia is the major oil supplier to China, which also buys energy from other nations in the region. In 2021, China purchased crude oil worth $43.9 billion from Saudi Arabia.

If the Asian Dragon is able to pay for this oil in yuan, it would not only save on dollars but would be able to set up a parallel system of payments and further project its currency worldwide.

Interestingly, Xi’s proposal has found favour in Riyadh as China is Saudi Arabia’s largest trade partner, with bilateral trade touching $87.3 billion in 2021, registering an increase of 30 percent over 2020.

In West Asia, Saudi Arabia is the major oil supplier to China

Moreover, Saudi Arabia, a long-standing ally of the US, has been miffed by the pressure it faced from Washington last year to increase oil production in the wake of the global shortage caused by Russia’s war in Ukraine.

Against this backdrop, the Saudi Kingdom is unlikely to lose a lucrative customer and a potential ally in China. Once Saudi Arabia is game, other nations in the region may also take a cue and switch their oil payments from the current dollar to the yuan.

Soon after President Xi laid bare his plans to dent the dollar, Russia announced that it will double the share of yuan from 30 to 60 percent in its National Wealth Fund, fully remove the dollar assets in the fund and reduce balances in the British pound and Japanese yen to zero.

According to a December 31, 2022 statement from the Russian Finance Ministry, the changes will help Moscow better adapt the currency composition of the NWF to the challenges facing Russia in the current macroeconomic and geopolitical climate.

dollar and yuan symbols, side by side, against backdrop of map of West Asia2 01
Other nations in West Asia may take a cue from Saudi Arabia and switch their oil payments from the dollar to the yuan

In 2021, Russia’s National Wellbeing Fund, too, had shifted its $169 billion worth holdings to currencies such as the euro, yuan and gold.

Interestingly, the move, which came just two weeks before the first summit between President Vladimir Putin and the US President Joe Biden, aimed to reduce Moscow’s dependency on the dollar amid increasing US restrictions as tensions grew over Ukraine’s proposed NATO membership.

Following the invasion of Ukraine in February 2022, the West stopped buying Russian oil and slapped harsh economic sanctions on Moscow for its aggression. Beijing then bailed out Moscow by purchasing its discounted oil in yuan terms.

Power of Siberia pipeline against snowy backdrop
ENERGY PROVIDER: Moscow emerged as one of Beijing’s top oil and gas suppliers after the recent opening of the Power of Siberia pipeline

Russia announced it will double the share of yuan from 30 to 60 percent in its National Wealth Fund

The China-Russia axis

Sino-Russian military cooperation has been going on for some years but Xi’s support for Putin has become more pronounced since the Ukraine war.

China refrained from condemning Russia for its aggression in Ukraine while blaming the US and NATO for pushing the Kremlin over the issue.

Although opinion is still divided on whether or not China had an inkling of Russia’s plans to invade Ukraine, when Putin visited Beijing at the launch of the 2022 Winter Olympics, the two leaders did proclaim the ‘no limits’ friendship between their countries.

Proof of this bonding on the economic front is that China-Russia trade is approaching the $200bn target, while on the military side, warships from the two countries have held joint naval exercises and conducted joint patrols in the East China Sea to ward off the US presence in the Asia Pacific.

Further, China has promised more investments in Russia, while Moscow emerged as one of Beijing’s top oil and gas suppliers after the recent opening of the Power of Siberia pipeline.

Although the China-Russia axis – driven by the coming together of two strong leaders in Presidents Xi and Putin – is proclaimed to be without any limits, the collaboration may be facing the test of time.

Recently, after the two leaders talked during a video call, Putin invited Xi to Moscow. However, the Chinese President has not confirmed the visit, which, many believe, might be seen as a public comment on the Russian President’s faltering military mission in Ukraine, which has pushed the world into turmoil. 

Dollar’s domination

China and Russia also face a problem in taking on the might of the US dollar. The dollar’s global domination began post-World War II when the US emerged as both a military and economic power and played a key role in creating a new world order in which institutions like the United Nations, the World Bank and the International Monetary Fund played a key role.

With the US economy around 50 percent of the international GDP then, the dollar became the global reserve currency facilitating payments across the world. It continues to do so today, although the share of the US economy in the global GDP has come down to around 24 percent.

As per a recent IMF report, 59 percent of global currency reserves today are in US dollars as compared to just 3 percent in Yuan. Up to the end of 2021, Russia held a third of the world’s yuan reserves.

The dollar’s domination has allowed Washington to pursue the US strategic agenda worldwide over the past decades. China and Russia, the recent collaborators, want to change this trend and are, therefore, trying to challenge the supremacy of the US currency.

Realistically, the dollar is unlikely to get pushed around by the yuan overnight, as the US currency accounts for almost 80 percent of global oil trade. Further, for all Beijing’s superpower ambitions, the Chinese currency is still not as popular and dependable worldwide as the US greenback.

Even so, the recent moves of the ‘no limits’ friends are sufficient to ring alarm bells in Washington.

Amit Agnihotri is a Delhi-based journalist who has worked with several national newspapers and focuses on politics and policy issues