On September 7, 2022, the Russian state company Gazprom announced that it had agreed with China and announced that the gas supplied to China would be paid in yuan instead of dollars. This situation has led to the strengthening of a discourse emphasized by Russia and China for a long time. Both actors want a greater floor and a more active position in international issues, and advocate the reconstruction of the world order and the transition to a multipolar world order.[1]
Russia also used the aforementioned discourse in the 7th Eastern Economic Forum and stated that the old world order has been destroyed, a new world order has been established and Asia has begun to play a leading role in economy and technology. In order to better understand the reasons for the de-dollarization attempt and why Moscow and Beijing need this initiative, it is necessary to recall the history of Russia and China’s relations with the West.
From the beginning to the end of the Cold War period, the United States of America (USA) and its allies entered into a long struggle with the Eastern Bloc, especially the Union of Soviet Socialist Republics (USSR), and they won this struggle. During this ideological war, the USA and its allies had tense relations with the USSR and experienced tensions with China from time to time. At the end of the Cold War, Russia was no longer a threat for USA and its allies since there was no USSR any more.
The relations with China, which were positive until 1989, continued tense until 2003 with the effect of the Tianenmen Incidents. As a result of China’s policies of opening up with Deng Xiaoping, China has become a global power in the 21st century and has a greater floor in the system. In this context, US-China relations have become increasingly complex.[2]
Secession From the Dollar
Russia’s annexation of Crimea in 2014 resulted in a series of sanctions by the USA and the European Union (EU). In this period, Russia preferred this way in order to get rid of the US sanctions and to protect itself from future sanctions. In 2014, China and Russia signed a three-year “currency swap” agreement worth approximately $24.5 billion worth 150 billion yuan. With this agreement, the two states were able to access each other’s currencies without the need for dollars. This agreement was extended for three years in 2017.
Although China has been experiencing tensions in its relations with the USA on issues such as Iran, Taiwan and Tibet and has witnessed the sanctions that Russia has been subjected to since 2014, it did not play as active a role as Russia in the de-dollarization project until it faced the USA in the trade war in 2018. As a matter of fact, when faced with some punitive commercial benchmarks in 2018, it started to act more actively for the de-dollarization project.
By 2019, Beijing quickly integrated into the de-dollarization initiative and signed an agreement with Russia. Thus, the yuan and ruble began to be used instead of the dollar in international transactions between the two states. The agreement also gave Russia great freedom of action against the dollar.
In 2013, Russia realized 80% of its total exports in dollars; by 2022, it realized a little more than half of its total trade in dollars.[3] Much of this decline was driven by trade with China. Apart from this, Russia has turned to the euro besides the yuan in order to suppress the dollar and save its trade from the domination of the dollar.
With the agreement, the Russia-China duo also agreed to establish a new system to replace the SWIFT system. In January 2019, before the agreement was signed, Russia announced that it had reduced its dollar holdings by $110 billion. In addition, Russia increased its yuan reserves from 5% to 15% by investing in the yuan. As a result of the agreement, Russia had a quarter of the world’s yuan reserves.[4]
Although the Sino-Russian union is beneficial for both sides, it is not equal. By 2020, the dollar was used in the vast majority of Sino-Russian trade. For example, while 27% of Russia’s exports to China are realized in dollars; 60% of China’s exports to Russia were realized in dollars.[5]
It should be noted that; recently it has become clear that the attempt to de-dollarization could not protect Russia. Due to the substitution of the euro for the dollar, Russia has become open to EU sanctions. The Moscow administration has already been subject to approximately 11,000 sanctions. Apparently; The attempt to de-dollarization did not protect Russia from sanctions, and did not spread the use of the yuan and ruble by other states. According to the data of December 2021, while the percentage of use of the yuan in the world is 2.7%, the ruble is 0.21%, the dollar is 40.5% and the euro is 36.7%.[6]
What Will the Russia-China Agreement Bring?
When the situation of the international system is examined, it is seen that Russia has been fighting in Ukraine since February 2022 and Ukraine has resisted with great acumen. The war is getting longer and longer and it increases Russia’s casualties. While casualties cause high costs, it seriously shakes the Russian economy. In this context, while Russia exhibits revisionist behaviors, at the same time, it tries to get rid of the effects of the sanctions imposed on both the state and individuals by the USA and the EU. For this reason, the Kremlin reiterates its call for the use of national currencies in commercial and economic transactions, which has been continuing since 2014, by the agreement it has made with China.
On the Chinese side, developments in Taiwan are decisive. The official visits, which began to be continuous after the visit of the Speaker of the US House of Representatives Nancy Pelosi to Taiwan, cause Beijing to conduct extensive military exercises around the island, and the exercises cause concern for most of the states in the Pacific region.
In the light of these developments, China and Russia dream of a new world order with a freer nature where trade and economy are not dependent on the dollar. For this, the integration of the Russian Financial Messaging System (SPFS) and the Chinese International Payment System (CIPS) units can be provided in the future and the parties can continue their trade from there. As a matter of fact, after Russia was removed from the SWIFT system, she directed many countries to SPFS and CIPS, the Chinese equivalent of SWIFT. Although this is a situation that arise from necessity, it will be declared that Chinese and Russian systems are integrated in the coming years.
On the other hand, although Russia and China seem like good friends, they are trying to gain influence in each other’s spheres of influence and both countries do not trust each other very much. While Russia is trying to consolidate its worn-out influence in the former Soviet geography, on the other hand, it tries to gain influence over the states in the Association of Southeast Asian Nations (ASEAN) region, including North Korea and South Korea.
On the one hand, China maintains its influence in the regions; at the same time, it is trying to gain influence in the Turkestan region through the Belt-Road Project and its investments. Even if China and Russia seem to be close friends in the current situation, they may abandon the economic and financial steps in question after the disagreements between the West and Russia are resolved or because of the change in common threat perceptions. In fact, issues such as Chinese immigration to Siberia have the potential to cause serious problems in the future.
In short, the cooperation between China and Russia brings many opportunities for the two countries as well as various problems. As long as Russia’s Ukraine problem and China’s Taiwan issue holds, these two countries will have problems that cause reaction and isolation in the international system. Thus, the partnership seems to continue. However, due to the mentioned possibilities, time will tell what the financial and economic partnership will evolve.
[1] “Russia’s Gazprom, CNPC Agree to Use Rouble, Yuan for Gas Payments-Gazprom”, Reuters, www.reuters.com/business/energy/petrochina-signs-gas-agreement-with-russias-gazprom-2022-09-07/, (Date of Accession: 07.09.2022).
[2] Cemre Pekcan, Çin Dış Politikası ve ABD ile İlişkiler, Dora Yayınevi, Bursa 2019, p. 77.
[3] Mrugank Bhusari-Maia Nikoladze, Russia and China: Partners in Dedollarization, Atlantic Council, www.atlanticcouncil.org/blogs/econographics/russia-and-china-partners-in-dedollarization/, (Date of Accession: 06.09.2022).
[4] “China and Russia Ditch Dollar in Move Toward Financial Alliance”, Nikkei Asia, asia.nikkei.com/Politics/International-relations/China-and-Russia-ditch-dollar-in-move-toward-financial-alliance, (Date of Accession: 06.09.2022).
[5] Mrugank Bhusari-Maia Nikoladze, Russia and China: Partners in Dedollarization, Atlantic Council, www.atlanticcouncil.org/blogs/econographics/russia-and-china-partners-in-dedollarization/, (Date of Accession: 06.09.2022).
[6] Ibid.
