The trajectory of economic growth and strengthening Russia’s financial sovereignty depends to a large extent on the efficiency of the de-dollarization process aimed at developing a multi-currency environment in international economic relations and improving the position of the national currency on the domestic and foreign markets.
The de-dollarization of Russia’s foreign reserves as factor of financial sovereignty
An important stage of the de-dollarization of the Russian economy is the diversification of foreign reserves, which is carried out by the Bank of Russia to ensure safety and maintain liquidity and earning power of foreign reserve assets. The past few years have shown that when there are political or economic conflicts between countries, the placement of the biggest part of Russia’s foreign assets in dollars and euros undermines the country’s financial independence and makes it susceptible to financial pressure.
For the Russian Federation, the size of foreign reserves serves as important reputational characteristic of financial stability and solvency of the state and a base of its financial sovereignty. Due to its foreign exchange reserves, the Russian Federation was able to provide for a smooth devaluation of the ruble in 2008, deal with the currency crisis in 2014, compensate for budget losses from dropping oil prices in 2020 and balance the situation on the foreign currency market in 2022.
Russia has enough foreign reserves that provide for the state’s ability to fulfill its external obligations and for many years have exceeded the indices recommended by the International Monetary Fund.
Even in 2023, which is not the best time for the Russian economy, Russia’s indices are almost seven times higher than international guidelines.
In addition, international reserves cover the consolidated foreign debt of the Russian Federation, which, according to the Bank of Russia, was $347.7 billion as of July 1, 2023. That is, the country guarantees the fulfillment of all obligations to the participants in foreign economic activity.
History of de-dollarization of Russia’s foreign reserves
Between 1999 and 2023, the US dollar lost its leading position in Russia’s foreign reserves. In 1999-2002, the share of dollar assets in the country’s international reserves was over 90%, while by the middle of 2021, it reduced to 16.4%, which is significantly lower than the global average (approx. 59%). The dollar assets have been practically excluded from the National Wealth Fund, which is also part of Russia’s foreign reserves. Overall, the Russian trend towards de-dollarization of foreign reserves corresponds with the global trend: since 1999, the share of US dollar assets in central bank reserves has dropped by over 11 percentage points.
Displacement of the dollar from Russia’s foreign reserves is taking place not solely due to an increase in alternative currencies but also due to a growing share of vaulted gold stored in the Bank of Russia, which helps reduce the risk of freezing the country’s sovereign foreign assets amidst imposed sanctions. Since the early 2000s, the share of gold as international reserves has increased by more than 33 times, including by 3.3 times in the past decade alone (between 2014 and September 2023).
Ways to optimize Russia’s foreign assets in the new economic reality
The de-dollarization of the Russian economy comes with a wider use of national currencies in the country’s mutual settlements with its trade partners, such as the Chinese yuan, dirham, Indian rupee, Turkish lira, and currencies of the EAEU member states. But the yuan is holding a specific place in the Russian market, with the Bank of Russia including its exchange rate against the ruble in key indicators of the national financial market, rising above the dollar. The share of the yuan in the Moscow Exchange’s current foreign exchange market is nearing 43%, while the share of the yuan in Russian-Chinese cross-border payments and collections has reached 48% by the end of this year’s first quarter – which is impressive, given that the said indicator was basically at zero back in 2010. A decision has been made on increasing the share of the yuan in the Russia National Wealth Fund to 60%. In recent years, the Chinese currency has been actively replacing the dollar in Russia’s foreign assets, with the Russian investments in it amounting to considerable 14% by mid-2021.
The greater role of the Chinese currency in the Russian economy is understandable: for years, China has been Russia’s largest foreign trade partner as a neighboring country that shares close historical ties as well as similar political and economic interests in many areas. Among the countries that constitute Russia’s foreign trading bloc, China has the strongest national currency, which was recognized by the IMF as a world reserve currency and included in the SDR basket in 2016.
Yet, the share of the yuan in global exchange reserves as well as in international settlements is still minor, although we can see positive changes in this regard. A stronger international position of the Chinese currency is hindered by its limited convertibility and tight foreign exchange controls in China, preventing it from being as stable as traditional reserve currencies.
In view of this as well as the negative effects of de-dollarization, the Russian Federation must avoid a structural imbalance towards the yuan when building state foreign reserves, as was the case with the dollar.
The national market being oversaturated with an alternative currency, although a ‘non-toxic’ one, may pose threats to the country’s financial security similar to the risks of dollarization, making the national economy dependent on the foreign market and a foreign economy. Russia’s foreign assets can be optimized solely with the megaregulator sticking to a balanced approach to their formation, which should involve efforts to include every currency in foreign reserves in the volumes necessary to meet the corresponding demand when fulfilling external liabilities, based on the trade balance with a particular country as well as international demand for this specific currency. That said, efforts should be made to consider the currency’s exchange rate volatility and investment returns.
We believe that the de-dollarization of the Russian economy through reducing the share of the dollar in foreign assets can essentially become a factor of the country’s financial sovereignty only in case the Russian ruble internationalization produces major results, reducing the national economy’s dependence on foreign currencies. The international community will recognize the ruble as a means of international settlements and a reserve asset only amidst the stability and strong purchasing power of the national currency, ensured by progressive economic growth, investment appeal of the Russian economy, and other factors.
By Elena Voronkova, Associate Professor, Department of State and Municipal Finance, Plekhanov Russian University of Economics