Efforts by China and Russia to chip away at the U.S. dollar’s dominance in global payments have gained urgency with the Ukraine war and tensions over Taiwan.
Russian President Vladimir Putin in June touted plans to create a new international reserve currency based on a basket of currencies of BRICS members Brazil, Russia, India, China, and South Africa.
Creating an alternative to the dollar-based global payments system would allow Moscow and Beijing to evade economic sanctions — a financial weapon whose powers and limits have become clear in Western nations’ response to the Russian invasion of Ukraine.
The proposal, which Putin said was “under review,” seems to envision a BRICS version of the International Monetary Fund’s special drawing rights — a reserve asset that IMF members can tap during a cash crunch.
The value of SDRs is pegged to a basket of five currencies: the U.S. dollar, the euro, the Chinese yuan, the British pound and the Japanese yen.
As a result of international sanctions following the attack on Ukraine, Russia has seen many of its banks excluded from the SWIFT global payments messaging system and lost access to its central bank’s assets parked overseas. For Russia, a BRICS-based reserve currency would provide a new tool for expanding transactions in currencies other than the U.S. dollar.
This initiative has no chance of posing a threat to the IMF-led currency establishment, said a Japanese official involved in currency policy.
“The BRICS currencies are weak in terms of stability, liquidity and the ability to retain value,” the official said. “Facebook’s cryptocurrency, libra, failed to take off because of those issues.”
Yet Russia and China have taken other steps to lay the foundation for an alternative payment system.
China in 2015 created the Cross-Border Interbank Payment System, or CIPS, in an attempt to offer an alternative to SWIFT. Participating banks totaled 1,341 as of June this year, including top Japanese banks as well as Deutsche Bank and JPMorgan Chase.
According to SWIFT, the Chinese yuan’s share in international settlements stood at 2.17% in June, up 0.4 point from two years earlier. The number is still far below the dollar’s 41.16%, and the euro’s 35.55%. But its share reached a record 3.2% in January, and at one point surpassed the yen to claim fourth place after the pound.
Overseas investors are increasing yuan-denominated bond holdings, and companies affiliated with Russian state-owned energy company Gazprom are switching from the dollar to the yuan for part of their payments, bolstering the currency’s standing.
“Sanctions against Russia have made China aware of the need to protect itself from possible financial sanctions in the future,” said Rie Nakada at the Daiwa Institute of Research. While she sees a sudden increase in yuan-based transactions as unlikely due to Beijing’s capital controls, Nakada said more institutions will consider taking part in nondollar settlement networks.
Attention is also on the fate of Russia’s SDRs, worth roughly $24 billion. The IMF distributed a record $650 billion worth of SDRs to members in response to the pandemic. Russia’s SDRs also increased as a result.
But in order for Moscow to exercise the SDRs, one of the five currencies’ central banks needs to agree. While that path is shut with the U.S., U.K., EU and Japan, China could agreed to exchange them with the yuan.
Analysts say China is unlikely to risk international backlash to come to the aid of Russia. But Robert Kahn of Eurasia Group says the world needs to pay attention to how financial relations between Russia and China are evolving.
Masaya Sakuragawa, a professor of economics at Japan’s Keio University, said, “Looking back at history, the currency order tends to change after a major war.”
The dollar established its global currency position when the U.S. provided assistance to war-ravaged Europe through the Marshall Plan after World War II. Similarly, China could boost the yuan’s standing by providing assistance to Russia after the war is over, Sakuragawa said.
