Yuan, Ruble, and U.S. Dollar Amid Russia-Ukraine War

Juliet Johnson's research focuses on the politics of money and identity, particularly in post-communist Europe. She is Professor in the Department of Political Science at McGill University, an Elected Fellow of the Royal Society of Canada, and Network Director of the Jean Monnet network Between the EU and Russia (BEAR). She is the author of Priests of Prosperity: How Central Bankers Transformed the Postcommunist World (Cornell 2016) and A Fistful of Rubles: The Rise and Fall of the Russian Banking System (Cornell 2000), lead editor of Religion and Identity in Modern Russia: The Revival of Orthodoxy and Islam (Ashgate 2005), and author of numerous scholarly and policy-oriented articles, including in the Journal of Common Market Studies, Comparative Politics, the Journal of European Public Policy, the Annals of the Association of American Geographers, Social and Cultural Geography, Post-Soviet Affairs, Central Banking, and Review of International Political Economy, among others. For many years she was editor-in-chief and co-editor of Review of International Political Economy; she currently serves on its International Advisory Board. She is a member of PONARS Eurasia, and has been an Advisory Council member for the Kennan Institute of the Woodrow Wilson International Center for Scholars, a Research Fellow in Foreign Policy Studies at the Brookings Institution, and the A. John Bittson National Fellow at the Hoover Institution. At McGill, she previously served as McGill Director of the Jean Monnet Centre Montréal, as Chair of the Department of Political Science, as Associate Dean (Research and Graduate Studies) for the Faculty of Arts, and as an elected member of the McGill University Board of Governors. She has received the University's David Thomson Award for Graduate Supervision and Teaching and the Faculty’s H. Noel Fieldhouse Award for Distinguished Teaching. She earned her PhD and MA in Politics from Princeton University and her AB in International Relations from Stanford University.
Muxi Li '23 interviewed Dr. Juliet Johnson on on December 2, 2022.
Photograph and biography courtesy of Dr. Juliet Johnson.

China, the second largest global economy, did not join in the Western-led sanctions imposed on Russia. How has China’s continued economic engagement with Russia enabled Russia to afford the costs of prosecuting its war against Ukraine?

Because Russia doesn't have the same Western markets it used to, Russian exports have been redirected towards China as much as possible. China was already an important oil market for Russia, and now it has become far more important. Without question, China's economic engagement with Russia has helped Russia to pursue its economic and military goals in Ukraine. Having said that, while it's true that China didn't join the sanctions, it is not going out of its way to help Russia either. For example, China is not giving Russia economic aid, it's not giving Russia discounts on anything. In fact, I very much see China taking advantage of the situation to increase Russia's dependence on China and to enhance China's position in the region. Hence, this is a situation where China is taking advantage of a situation where Russia needs China much more than China needs Russia.

China is getting a very good deal on oil prices now. Because Russia doesn’t have alternative markets, it must make deals that are very unfavorable. Indeed, Russia doesn't have the same negotiating power as China. If China really wanted to help Russia prosecute the war, the government might give Russia some concessions. But it's not doing that.

At the start of the war, the U.S. froze Russia’s reserves held abroad, limiting Russia’s ability to use foreign exchange reserves to prop up the ruble. What steps did Russia take to try to support its currency, despite its restricted access to its foreign exchange reserves held abroad? Was it effective?

Russia has done a lot of things. After an initial spike in inflation and a fall in the value of the Ruble, Russia took very effective measures to deal with the immediate financial crisis. The Russian Central Bank ratcheted up interest rates immediately. It closed down the stock market, and made it very difficult to trade and for foreigners to take any gains out of Russia. Foreigners simply could not sell their stocks. In fact, Russia made it difficult in general to export capital. The government also put monetary restrictions on Russian companies and Russian individuals. Individuals, for example, could only withdraw certain amounts of hard currency. The Central Bank in particular required Russian exporters, especially exporters of oil and gas, to convert 80% of their hard currency earnings into rubles. Customers also had to pay in rubles. All these efforts were ways of maintaining Russia's stock of hard currency given that half of the reserves were frozen and untouchable. Another significant percentage of reserves were in gold, which is less fungible. Therefore, by making sure that a lot of the capital that was already in the country stayed in the country and by forcing exporters to repatriate their capital and put it in the Russian Central Bank, the ruble stabilized, inflation came down, and the exchange rate stabilized as well. Even when the war started, and the sanctions first began, people were expecting Russia to have GDP drops of 20% or 30%. Some even predicted 40%. This year, the final number is going to be closer to a 5% GDP drop. So even though there was initially a big shock, Russia’s responses were effective, at least in the short term.

What are the impacts of the war on China’s currency? Specifically, do you think that the war will stimulate RMB to become a more important global reserve currency? What are the advantages to this?

Yes and no. This is tricky. In terms of the impacts of the war, it does make the Chinese currency more important. For example, Russia is now much more willing to operate in yuan. And while their bilateral deals have been talked about for a long time, the war is now making them more real. On top of that, the sanctions on a major world economy have involved not only cutting Russian banks off from SWIFT, but also freezing foreign exchange reserves and other measures like pulling VISA and MasterCard out of Russia. The international ratings agencies now refuse to rate Russia at all. In essence, Russia has been cut from an international financial infrastructure that was supposed to be apolitical. This encouraged third party countries to think more in terms of diversification, eyeing their own reserves and questioning their overwhelming use of the U.S. Dollar. This was especially true in East Asia and Southeast Asia. In this sense, it probably will boost the profile and the day-to-day use of the yuan. But it's a little early to say.

In terms of the advantages, this is a fascinating question. For a long time, China has wanted to increase the role of the yuan in the international system. That said, there's a difference between giving it a more prominent role and displacing the dollar. It is important to remember that what China really wants is just to give its currency a more prominent role. The kinds of things that Russia tried to do with the ruble are appealing, like trying to avoid using the U.S. Dollar in bilateral trade, especially in energy contracts. It also wants to give the yuan a higher profile at the IMF in Special Drawing Rights and to encourage major economies to include yuan as part of the reserves. Those things are good for China. But it isn’t in China's interest to challenge the dollar's hegemony. First of all, that would require China to open its current and capital accounts. China's obviously very worried, for example, about foreign inflows. Opening the current and capital accounts would challenge some of the fundamental workings of the economy. It would also require a real deepening of Chinese financial markets, and a more transparent legal system that international actors would trust. At the same time, it requires the U.S. Dollar to become comparatively less attractive. In 2008, when the international financial crisis started in the United States, the value of the dollar went up. Though the crisis started in the U.S., the U.S. Treasury bills were still a safe haven. Thus, the U.S. Dollar dominance is baked into the international system. The other point is the U.S. is willing to run these trade deficits and savings deficits. This arrangement works for the U.S. economy and the Chinese and Russian economies. China runs a trade surplus in great part due to US dollar dominance and it really does not want that to end. So, the short answer is, yes, China is interested in increasing the international profile of the yuan, but not to the extent that it would actually take over the position of the U.S. dollar. What China is really more interested in is the creation of a more truly multi-currency world with still the dollar as the de facto international reserve currency.

What are the strengths and weaknesses of the RMB compared to other currencies, especially the U.S. dollar?

The weaknesses include the lack of deep financial markets in China and the lack of open current and capital accounts. China doesn’t have financial instruments that are anywhere near the equivalent of U.S. Treasury Bills. The dollar has the financial infrastructure, the backing of the U.S. government, and its massive economy, and the willingness to run these deficits to support the dollar. Over the past several decades, an international financial architecture has become dollar dominant. It is institutionalized in contracts and trading relationships in foreign exchange markets.

What steps have Russia and China taken over the past decade to weaken the hegemonic position of the dollar in the global economy?

Russia spent a lot of time on its part, not necessarily trying to weaken the position of the dollar in the international economy, though it has done that, but trying to weaken the position of the dollar in its own economy. Russia was very dollarized coming out of the 1990s. It had an extremely volatile currency and very thin financial markets. People used the U.S. dollar for major transactions. They would walk around with $100 bills to do regular transactions, like renting apartments. Russians wouldn't keep savings in rubles, they didn't trust the ruble. Instead, they would keep their savings in dollars. Especially after the 2008 financial crisis, the Russian government undertook a major effort to try to de-dollarize its own economy. This involved some coercive measures forcing people to bring money home, putting limitations on dollar accounts, and prohibiting retail organizations from pricing things in dollars. The government also created public relations campaigns about how patriotic it was to hold rubles. It also made a big effort to push the ruble as a currency of choice in what Russia calls the near abroad, namely Central Asia, the Caucuses and even Ukraine. Russia did manage to de-dollarized the economy to a significant extent. 

Reducing the role of the U.S. dollar externally was not much of a success, however. There were many attempts by Russian officials to use their position as an oil and gas exporter to force other countries to use the ruble. But again, Russia’s counterparts have to be willing to accept other currencies and most didn't want to, especially given Russia's track record. I should point out that especially before Putin came to power, Russia had a lot of dollar-denominated debt and foreign currency-denominated debt. The government made a major effort to eliminate debts and have Russia's sovereign debt be denominated in rubles. Russia didn’t eliminate the debts completely but lowered them significantly. 

Moreover, Russia and China have been building alternative international financial institutions, like the BRICS Development Bank. These financial institutions are designed to provide development loans to countries in the region and elsewhere, like Africa. Creating these financial institutions—that are controlled by China, Russia, and the other BRICS countries—is meant to substitute for the World Bank and the IMF. That's a way in itself to reduce the role of the dollar not only in development assistance, but also in the provision of international loans. This had some success, although it did reduce the amount of loans or things that the IMF and the World Bank do. But it provided alternatives that explicitly have less political conditionality. So it was more attractive to a lot of governments.

Muxi Li CMC '23Student Journalist

bykst, CC0, via Wikimedia Commons

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