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Russia Seeks to Reduce Dollar Dominance

The world economy was severely shaken after the outbreak of the Russian-Ukrainian conflict so much that the dollar began to be questioned as the main currency. This was also stated by Gita Gopinat, First Deputy Director General of the International Monetary Fund (IMF). According to her, unprecedented financial sanctions imposed on Russia threaten to gradually reduce the dominance of the US dollar in world trade and could lead to fragmentation of the international monetary system. Gita Gopinat assessed that the comprehensive measures imposed by Western countries on Russia after the attack on Ukraine, and even on the Russian central bank, could encourage the emergence of small currency blocks based on trade between certain groups of countries.

“The dollar would remain the main global currency even in that environment, but fragmentation on a smaller scale is quite possible. “We are already seeing some countries renegotiating the currency in which they will pay for mutual trade,” she said.

These days we are witnessing a real alarm over Russia’s demand that hostile countries pay for gas in rubles. They made an additional move by offering investors to fully buy their $ 2 billion government bonds, for which the coupon expires on April 4. Payment will be made in full for those who will accept the offer in rubles. Russia’s finance ministry says it has paid $ 102 million in bonds with a maturity of 2035, the third payment since Western sanctions called into question Moscow’s ability to service its foreign currency debt. What intention do the Russian financial authorities want to achieve with these moves and can they endanger the US dollar as a primary means of payment in world trade?

The Financial Times reports that Russia has been trying for years to reduce its dependence on the dollar and that the campaign has accelerated significantly since the United States imposed sanctions in retaliation for the annexation of Crimea to Russia in 2014. Despite these efforts, Russia still had about one-fifth of its foreign exchange reserves in dollar-denominated assets just before the start of the military operation in Ukraine, holding a significant portion of those reserves abroad – in Germany, France, Britain and Japan.

The yuan can not replace the dollar

The US dollar’s share of international reserves has fallen from 70 per cent to 60 per cent in the last two decades, with the share of other currencies traded led by the Australian dollar. Approximately a quarter of the decline in the share of the US dollar can be explained by the greater use of the Chinese yuan (renminbi). However, less than three percent of the central bank’s global reserves are denominated in Chinese currency, according to the IMF. Beijing was in the process of internationalizing renminbi before the current crisis and is already ahead of other countries with the introduction of the central bank digital currency, and Gita Gopinat believes that the yuan is unlikely to replace the dollar as the dominant world currency.

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