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Russia’s Deputy Foreign Minister Alexander Pankin has stated that Russia will move away from use of the US dollar and the Euro in its commercial, economic, and investment relations with its trade partners, as these currencies have become “toxic” amid growing pressure from the West.

“Against the growing geopolitical pressure from the ‘collective West’, the only way to guarantee stable trade, economic, and investment ties between Russia and its partners is to avoid the use of currencies that have become ‘toxic’, primarily the US dollar and the Euro, and switch to settlements in acceptable alternatives, primarily in national currencies” Pankin said.

He noted that the current global financial system built by Washington has proven to be “unsuitable for the conditions of a multipolar world order and has essentially become an instrument for achieving political goals of one group of countries.”

“It is quite obvious that in the current conditions the West intends to continue to abuse its privileged position.” Pankin continued. “It is encouraging to see that many nations, seeing extraordinary and illegitimate sanctions against Russia, are thinking about the need to de-dollarize their own foreign economic activity to ensure their sovereignty. It has become apparent, that if there is political will, the issue is quite solvable.”

That is a reference mainly to China, which has been reducing its US dollar holdings. Its holding of US dollars in its foreign exchange reserve has fallen for four straight months, declining by US$130.4 billion to US$3.12 trillion on August 16. China’s holdings of US Treasury bills have also dropped for four months in a row, with a combined reduction of US$41.2 billion. Russia has almost completely de-dollarized its foreign exchange holdings and has instead built-up reserves in China’s RMB Yuan. The US dollar plays a dominant role in the invoicing of international trade, albeit not an exclusive one as more than half of global trade is invoiced in other currencies, with the Euro also having a significant role, and the RMB Yuan with a rising role in prominence.

With Western sanctions imposed upon Russia, and the country turning to other markets, there is no real need for Russia to continue to use either US dollars or Euros. In fact, the Russian Ruble is currently the world’s best performing currency this year, recovering from a low of 150 in March to the dollar to 60 this month as Moscow introduced measures to protect its value and insist on its use when selling commodities such as gas and other trade items.

Washington’s moves to use its currency as a trade weapon may backfire, with the IMF noting earlier this year that the unprecedented level of financial sanctions imposed on Russia “threaten to gradually dilute the dominance of the US dollar and result in a more fragmented international monetary system” according to Gita Gopinath, the IMF’s deputy managing director, who added that “the sweeping measures imposed by western countries upon Russia, including restrictions on its central bank, could encourage the emergence of small currency blocs based on trade between separate groups of countries” which appears to be exactly the developing situation.

Russia, China, India, Iran, Saudi Arabia and Turkiye have all put into place mechanisms to use their own currencies in trade, while significant blocs such as BRICS and the Shanghai Cooperation Organisation are also considering introducing such measures. Should African and Latin American countries join the trend – which is increasing – then the use of the US dollar – and Euro – in international trade is bound to decline.

The United States also threatened Chinese banks with disconnection from SWIFT earlier this year, another reason for Beijing to mistrust US involvement in the existing global currency environment.

In a sign of things to come, trade in the Chinese Yuan outstripped that of the US dollar on Thursday (August 18) at the Moscow Exchange for the first time. The Yuan-Ruble trading with payments totaled ¥45.4 billion (US$756.9 million), while the US Dollar-Ruble trading volume was ₽43.7 billion (US$730.2 million). The volume of trading in the Euro was ₽49.9 billion (US$833.9 million), placing it marginally ahead of the Chinese Yuan leaving the US dollar in third position.

If the US dollar continues to decline, there is likely to be no future single currency as a global focal point in future as the Euro is tied to too many disparate political entities, with too few assets for global investors. There is also the risk of trade sanctions being imposed from Brussels. The EU has issued more sanctions against countries (not just Russia) in 2022 than it had in the past decade as it increasingly politicizes trade. The EU tore up the short-lived EU-China CAI trade agreement in 2021 over what it perceived as human rights abuses in China’s Xinjiang Province, although Beijing denied this. Nevertheless, the situation shows that Brussels is prepared to politicize trade and interfere in other countries’ security issues – a situation that will not encourage emerging nations as by default they tend to possess some instabilities and market sensitivities.

This means that the Chinese Yuan will become more prominent but not dominant, as Beijing keeps a tight rein on its use.

Other, technical issues will also impact how currencies develop in future, with Russia’s SPFS alternative to SWIFT being promoted to members of the Shanghai Cooperation Organisation, which has the potential to massively influence global currency trading, while the eventual sovereign institutionalization of cryptocurrencies will also play an important role.