- EBRD paper notes the reduced attractiveness of the US dollar in international trade
- Russia is turning to the Chinese yuan as an invoicing currency
- Research notes the rise of alternative currencies in international trade settlements
The rise in global geopolitical tensions and the use of economic sanctions may reduce the attractiveness of the US dollar as a currency in international trade and facilitate the rise of new international currencies, according to a working paper, entitled Exorbitant privilege and economic sanctions, recently published by the European Bank for Reconstruction and Development (EBRD).
This could, in turn, lead to greater fragmentation of global payment systems. The paper also notes a substantial change in the invoicing currencies used in import and export transactions since the start of the war on Ukraine and the subsequent imposition of trade sanctions on Russia.
The working paper studies the impact of trade sanctions on the choice of currency used in international trade transactions. It focuses, in particular, on the sanctions imposed on Russia by the European Union, the United States of America and a number of other advanced economies following Russia’s full-scale invasion of Ukraine in February 2022.
“We see a substantial increase in the use of the yuan in Russia's imports from China, accompanied by a declining share of the US dollar,” says EBRD Chief Economist Beata Javorcik, one of the paper’s authors. “We have also observed an increase in the use of the yuan as an invoicing currency by third countries. Thus, while dollar dominance makes sanctions more effective, the sanctions could, in the long run, lead to some erosion of this dominance.”
The sanctions have imposed restrictions on the export of various goods to Russia, as well as on certain imports from Russia. They have limited the financial services that can be provided to Russian entities and suspended the access of some major Russian banks to SWIFT, the dominant system for cross-border payments.
Prior to March 2022, up to 80 per cent of Russia’s imports had been invoiced in US dollars or euros. By the end of 2022, invoices in Chinese yuan (CNY) accounted for 20 percent of Russia’s imports, a sharp increase from 3 per cent a year earlier, while the invoicing share of the US dollar and the euro had declined to 67 percent.
The research published by the Bank shows that the use of the CNY as a vehicle currency had increased 4 per cent, on average, among trading partners that had active currency swap lines with the People’s Bank of China (PBOC), such as Mongolia and Tajikistan.
It also suggests that the share of CNY invoicing has increased more for those goods currently under EU sanction. For instance, the CNY shares of invoicing for dual-use and industrial-capacity goods increased by an additional 6-8 percentage points compared with non-sanctioned goods and trends observed among other trading partners.
The rise of CNY invoicing was most notable in payments for goods coming from China, where the yuan overtook the US dollar in the second half of 2022. However, the yuan was also actively used for settling trade with third users, such as Mongolia (where the share of CNY invoicing rose to 18 percent from zero in 2021), the Philippines, Malaysia, the United Arab Emirates (UAE), Thailand, Japan, Tajikistan and Singapore. A small percentage of trade transactions with the EU, the United Kingdom and the United States of America was settled using CNY as a vehicle currency.
This trend can also be observed in Russia’s exports, albeit to a lesser extent because of the dominance of oil, gas, coal and other commodities typically traded in US dollars in its export mix. Trading partners paying for Russia’s exports in CNY are geographically more diverse, with the top emerging users including Costa Rica, El Salvador, Cote d’Ivoire, Thailand, the UAE, Cameroon, Colombia and Nicaragua.
Overall, the EBRD working paper suggests that the imposition of trade sanctions on Russia was followed not only by swift changes in the geography of trade flows but also significant shifts in the currency of invoicing.
While the paper covers a relatively small part of international trade – the bilateral transactions of Russia, the 11th-largest economy in the world – it indicates a rapidly developing trend. Rising geopolitical tensions generally and the use of trade sanctions, in particular, may reduce the appeal of the US dollar as a vehicle currency in international trade and facilitate the rise of new international currencies, as well as the greater use of producer or importer currencies to settle trade.
This, in turn, may lead to greater fragmentation of global payment systems. The BRICS economies (Brazil, China, India, Russia and South Africa), for instance, are encouraging greater use of alternative currencies and have said they intend to develop a new cross-border payments system, BRICS Pay.