How is Russia Reacting to De-Dollarization?

One of the biggest financial stories of 2018 was the re-emergence of the US dollar. It was an astonishing recovery after the currency’s weak performance the year prior.

However, that might be the last time the greenback demonstrates such strength in a while. Along with the probability of intentional devaluation by the American government in hopes of easing the repayment of the United States debt, the global effort to de-dollarize has been growing stronger.

Unsurprisingly, Russia is leading the way in knocking the dollar off its pedestal in the name of economic survival, after continually being at the receiving end of the threat of US Sanctions.

According to Fortunly, the Russian ruble experienced a sharp decline in value after the dollar regained its might last year. Naturally, Russia has to take the necessary steps to reduce its economy’s vulnerability whenever America chooses to weaponize its own currency to win geopolitical battles and protect its hegemony over the rest of the world.

Russian President Vladimir Putin made no secret about his plan to diminish the role of the US dollar in global trade. Although the leader’s pronouncement was bold, the Kremlin is not acting hastily. There are several explanations why that is the case.

Eurorization Needs Time to Gain Momentum

Russia’s strategy to wean itself off the US dollar is two-fold. The first is to shrink the country’s greenback reserves, and the second is to increase the share of other currencies in its international trade. The latter proves to be more complicated.

The euro is at the center of Putin’s diversification plan. The European Union’s official currency is the one best substitute for the US dollar because of its strength and stability.

As much as Russia wants to promote its own currency, it simply will not prosper. Like the Turkish lira and the Chinese renminbi, the Russian ruble is prone to enormous exchange rate fluctuations.

Despite the stature of the euro in international commerce, convincing Russian partners not to trade heavily with the US dollar is easier said than done. Nevertheless, the idea is growing on many buyers of Russian exports.

In fact, the share of the greenback in exports from Russia to the European Union in the first half of 2019 fell to 46%, which was the first time in history that the figure dropped below 50%. The US dollar’s share remained superior to the euro’s 42%, but it was still a symbolic victory for Putin’s de-dollarization vision.

SWIFT Replacement Does Not Happen Overnight

Full liberation from the US dollar means independence from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system, which is largely viewed as being biased toward the United States.

It requires a massive amount of financial and political capital to replace the existing financial infrastructure. Even after Germany, the de facto leader of the European Union, called for the creation of an alternative global payment system, Russia and other countries supporting de-dollarization know that executing such an idea can take many years.

The notion that the days of the US dollar as the world’s most dominant currency might be numbered is slowly becoming a reality. Whether it happens under the watch of US President Donald Trump or his successor, large-scale de-dollarization will lead to a tectonic change in the world order.

Infographic URL: https://fortunly.com/infographics/the-rising-dollar-infographic/