Russia Empowers China by Dumping Euros for Yuan

Russian President Vladimir Putin and Chinese leader Xi Jinping during their meeting in Beijing on Feb. 4, 2022. (Alexei Druzhinin/Sputnik/AFP via Getty Images)

Commentary

Moscow on Feb. 9 announced plans to exclude Europe’s currency from Russia’s sovereign wealth fund. Starting this year, China’s yuan and gold will apparently take the euro’s place. According to Russia’s TASS state media, the yuan may now compose up to 60 percent of the country’s currency funds and gold up to 40 percent.

Moscow’s National Wealth Fund (NWF) holds $148 billion in assets, originally meant to service its pension obligations. However, the fund is now being used to make up for the Russian deficit, down $38 billion in just a single month, between December and January.

Europe banned Russian oil, and much of the rest of the world is abiding by a $60 per barrel price cap, or buying at even lower market rates. Increasing war expenses and the drop in oil revenues are thus eating away at the future of Russia’s elderly.

The shift of the NWF from euros to yuan and gold is part of more generalized efforts on the part of Russia, China, and their partners to decouple from the powerful currencies of democracies, including most predominantly the U.S. dollar, but also the euro, Japanese yen, and British pound.

Countries that transgress international law can be penalized by having their foreign reserves in these currencies frozen, as happened to Russia after it most recently invaded Ukraine.

Rogue regimes see gold and China’s yuan, on the other hand, as sanction-proof, though these alternatives are relatively illiquid on global markets, putting downward pressure on their value.

That the yuan is not freely traded raises additional questions about whether it is fit for purpose as an international reserve currency. Yuan dependency, if it develops over time, will give Beijing even more economic influence globally, especially with the world’s poorest countries.

The dollar, on the other hand, has reigned supreme since World War II, from which the U.S. economy emerged as the world’s economic powerhouse. The United States used its economic power to promote democracy, market economies, and human rights around the world, with more or less success in different countries.

In 2022, the world’s central banks still had 59.8 percent of their foreign exchange reserves in dollars, 19.7 percent in euros, 5.3 percent in yen, 4.6 percent in pound sterling, and just 2.8 percent in yuan.

However, over the last year, the quantity of dollars held as international reserves fell from $7.1 trillion in 2021 to $6.4 trillion in 2022. That puts upward pressure on U.S. inflation, which Beijing cites as one of many economic problems in the United States, shaking confidence in the dollar.

The Chinese Communist Party (CCP) clearly hopes for the U.S. economy and the dollar to spiral downward together in a self-defeating cycle.

Beijing sees a weakening U.S. dollar as an opening, but its own currency weakness is even more pronounced, and a sore point for its self-image as an up-and-coming global hegemon.

The regime’s dollar reserves are self-defeating for the CCP, as they are part of the global stability of the dollar, though Beijing has wound them down from $4 trillion in 2014 to $3 trillion today.

That $3 trillion still entails liabilities, given the increasing animosity between the two nations and the U.S. government’s ability to freeze the dollar assets of its adversaries. Yet it is hard for China and Russia to escape the gravitational pull of the U.S. and European economies when they account for approximately 32 percent and 25 percent of global wealth, respectively. China accounts for just 18 percent.

Aircraft of the Eastern Theater Command of the Chinese People's Liberation Army (PLA) conduct joint combat training exercises around Taiwan on Aug. 7, 2022. (Li Bingyu/Xinhua via AP)

If China’s military invaded Taiwan, for example, the U.S. government would likely freeze Beijing’s dollar reserves as one of many economic sanctions imposed on the country. This freeze would parallel that imposed on Russia.

If Moscow and Beijing could succeed at de-dollarizing the global economy—perhaps with the help of Saudi Arabia, which prices oil exclusively in dollars—they would help protect themselves from sanctions. They would also seek to increase global demand for yuan and rubles, allowing the two countries to print substantial amounts of currency without inflating the yuan and ruble. Meanwhile, de-dollarization would decrease international demand for dollars, putting them onto the market and increasing U.S. inflation yet further.

A similar logic applies to Moscow’s divestment from the euro, and move toward yuan and gold reserves. However, Moscow’s increasing reliance on the yuan ultimately puts Russia’s economy in jeopardy just as much, as Beijing will ultimately attempt to use that reliance as leverage for its own purposes.

That Moscow is moving quickly toward the yuan as a foreign exchange reserve, without a similar move by Beijing toward the ruble, is yet more evidence that Beijing is now the dominant partner in the relationship.

The Chinese regime is territorially expansionist, and if strong U.S. alliances block its expansion in Asia, it could eventually turn toward Russia’s Far East. From a realist perspective, Moscow’s stalled invasion of Ukraine looks particularly foolhardy, as it is not only rapidly expending its military materiel, manpower, and reserves for few territorial gains, but creating an enemy of the West, dependency on the East, and leaving its eastern flank vulnerable.

In effect encouraging that dependency, China’s state media, the Global Times, quoted several analysts who welcomed Russia’s shift away from the euro and toward the yuan.

One analyst claimed that geopolitical competition has accelerated a global trend of de-dollarization.

“The role of the U.S. dollar in the international financial market is not as strong as it used to be, and the U.S. government has been increasing its control over the dollar, making many countries look for alternative currencies,” he said.

If the United States does not do more to stop communist China’s rise, he may be right.

Sanctions on regimes in Russia, Iran, Burma (Myanmar), North Korea, Cuba, and Venezuela, without equal or stronger sanctions on China, simply center the Middle Kingdom between the democracies and the rogues, and increase the world’s trade dependency on Beijing as a go-between and source of foreign exchange. That puts all of us at Beijing’s mercy, and gives yet more power to the CCP.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.