China, Russia Turn Away from USD

De-dollarization at work . . . 

For the first time, the USD’s share as the settlement currency in bilateral trade between China and Russia has fallen below 50 per cent. According to data from the Russian Central Bank and the U.S. Federal Customs Service, the USD accounted for 46 per cent of China-Russia trade settlements, the euro for 30 per cent, and national currencies (the Russian rouble and the Chinese yuan) for 24 per cent in the first quarter of 2020. To increase their trade in national currencies instead of the USD and euro, Moscow and Beijing also intend to renew their C$29-billion currency swap agreement, established in 2014, and create a cross-border interbank payment system.

Growing Beijing-Moscow financial collaboration . . .

Beijing and Moscow’s financial collaboration efforts come as a reaction to a range of geopolitical factors. Since 2014, Russia has faced repeated sanctions from the U.S., the E.U., and others, for its take-over of Crimea, spy-scandals in Europe, and interference in the U.S. presidential election. In response, Russia moved to other currencies for settling international transactions. And for more than a decade, Beijing has been actively implementing a long-term strategy to internationalize the yuan, promoting its use for bilateral trade settlements. Meanwhile, the Trump administration’s explicit use of U.S. financial instruments for achieving its foreign policy and trade objectives has forced its major trade partners – including China and some E.U. members – to seek ways to reduce their dependency on the USD-based system.

… or skirting U.S. jurisdiction?

By reducing their use of the USD as a settlement currency and striking deals outside the U.S. banking system, Beijing and Moscow could be ensuring their firms are not subject to U.S. jurisdiction, avoiding the long arm of U.S. law enforcement. The ongoing legal case against Huawei’s Chief Financial Officer, Meng Wanzhou, arrested in Vancouver in December 2018 on a U.S. extradition warrant, is a case in point. In part to avoid similar incidents, in June 2019, the Chinese and Russian presidents agreed to use national currencies for international settlements between the two countries and to create an alternative system to the SWIFT global payment system.