The latest round of U.S. sanctions on Russia is expected to further solidify the Chinese yuan’s position as the primary currency for Russian trade, according to a Germany-based think tank.
What Happened: The new sanctions, while not expected to be a game-changer, will likely reinforce the yuan’s role in place of Western currencies, the Carnegie Russia Eurasia Center fellow Alexandra Prokopenko wrote in a commentary.
“There is still a long way to go before there is a real threat to the dominance of the dollar, but the trend toward the fragmentation of the global financial system cannot be reversed now,” Prokopenko said.
The sanctions, announced earlier this month, are designed to exert broad pressure on Russia’s remaining financial lifelines. This includes the Moscow Exchange and other major entities that facilitate currency transactions.
As a result, the Moscow Exchange has restricted the exchange of dollars and euros, effectively halting the primary source of access that Russians had to Western currencies. This will likely lead to a more complex and costly exchange process, potentially creating various exchange rates for the ruble.
Prokopenko predicts that these sanctions will further establish the yuan as the main currency for exchange trading and settlements in Russia. The yuan’s share in exchange trading reached 53.6% in May, while its share in the over-the-counter market was 39.2%.
“The new sanctions are turning the yuan into the main currency of exchange trading and settlements in Russia once and for all,” she predicted.
Despite the new U.S. restrictions threatening secondary sanctions on foreign institutions that facilitate financial ties with Russia, Prokopenko believes that this is unlikely to eliminate the yuan’s trade.
Why It Matters: The latest sanctions are expected to exacerbate the volatility of the ruble and complicate its use in foreign trade. This is likely to further drive the shift towards the yuan as the primary currency for Russian trade, a trend that has been emerging over the past few years.
Last year, JPMorgan strategists noted that while the dollar’s long-term dominance is expected to continue, there are signs of de-dollarization in the global economy. This shift is being driven by various factors, including the rising influence of digital assets and the increasing use of alternative currencies in international trade.
Similarly, in January, Morgan Stanley warned that the U.S. dollar’s global dominance is at risk due to the growing influence of digital assets and central bank digital currencies (CBDCs). This shift could potentially lead to a decline in the dollar’s share of global foreign exchange reserves, further driving the trend of de-dollarization.
Despite these warnings, some experts, such as Steve Eisman, have dismissed the idea of the dollar losing its reserve currency status. However, the latest sanctions on Russia are likely to further accelerate the trend of de-dollarization, potentially leading to a significant shift in the global financial system.
Photo courtesy: Shutterstock
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Comments
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.
