“We will continue to use all available tools to prevent Russia from using the international financial system,” the US State Department said last week when it imposed new sanctions on Russia over its war with Ukraine. And in response, the Eurasian country is relying on cryptocurrencies to develop alternative payment systems. Cryptocurrencies play a fundamental role for Russia, as highlighted by the Russian bank Transstroy. In this regard, it points out that The Central Bank will move forward with three tests with cryptocurrencies based on the National Payment System (NPS) as part of an experimental legal regime. First, Cryptocurrencies will become a full-fledged means of payment in foreign tradeSecondly, cryptoassets will become the subject of currency trading. And thirdly, the Central Bank plans to create an electronic platform for transactions with digital currencies based on the NPS, as it has a developed infrastructure for processing them. Details are still to be known regarding the use of cryptocurrencies for foreign trade, as well as for their integration into the Russian financial system, but lawmakers have been assessing the challenges. Mikhail Uspensky, a member of the expert council on legislative regulation of cryptocurrencies in the State Duma, notes that “The main challenge is compliance risks for foreign partners. Fear of secondary sanctions may significantly limit the pool of counterparties willing to work with Russian cryptocurrency transactions. It should be recalled that the State Duma, the lower house of the Federal Assembly of Russia, approved a bill legalizing Bitcoin mining and the use of cryptocurrencies for cross-border payments, which came into force on September 1. This is undoubtedly a paradigm shift if one takes into account that before the conflict in Ukraine in 2022, the Central Bank of Russia had advocated for a complete ban on cryptocurrencies. Now, the governor of the Central Bank of Russia, Elvira Nabiullina, stated that the use of cryptocurrencies in international trade could begin by the end of 2024.
Additionally, the Russian Central Bank launched a test of the digital ruble last year, expecting widespread adoption in the coming years. All of this “is preparing a strong blow to the dollar,” as noted by analysts in China who published a recent article, in which they claim that “Russia is going to put an end to American hegemony.”
Russia is set to challenge the dollar's long-standing dominance, though it has recently lost ground. Source: Brookings.
More payment alternatives to challenge the dollar's dominance
A new payment option is reportedly emerging between India and Russia to settle trade. “Following the recent meeting of Prime Minister Narendra Modi with Russian President Vladimir Putin in Moscow, where both agreed to promote trade settlement in national currencies and Introducing digital financial instruments into mutual settlementsa source who follows the matter told Businessline. Talks between the two nations are still ongoing, but the proposal is to use the SPFS (System for the Transfer of Financial Messages) that Russia tested in 2014 to Conduct transactions in rupees and rublesBy 2023, more than 400 financial institutions had adopted SPFS. As reported by BitcoinDynamic, as a result of the sanctions Russian banks were expelled from the Society for the Worldwide Interbank Financial Telecommunication (SWIFT), the infrastructure to which most of the world's banks are affiliated. Since then Russia and its partners have been looking for other ways to do business outside the Western-led order. Now, what is happening is that Russia and its allies, such as China, are banking and trading in their own currencies, away from the watchful eye of the United States. The Chinese government, for example, has promoted The yuan as an alternative to the dollar in trade matters and development financing. In fact, the Chinese yuan is rapidly rising in trade settlements, overtaking the euro and becoming the second most used currency after the US dollar. The dollar is currently entrenched in the global financial system, but New platforms are emerging that could undermine their dominance.
At the St. Petersburg International Economic Forum in June, Russian President Vladimir Putin said the dollar and euro's share of his country's exports would be halved relative to trade by 2023, while the ruble's share would rise to 40%. To achieve this, Russia is also relying on its own Mir payment system to replace Visa and Mastercard, which soon became another target of Western sanctions. Among its goals Russia also sets out toIncrease the share of currencies other than the dollar and the euro in its international trade to 80% by 2030.
The dollar has been losing market share against other currencies. Source IMF.
Is the dollar losing its dominance?
Yes, that is the answer to the question of whether the dollar is losing its dominance, according to indicators published in a recent report. “For example, the dollar’s share of global reserves has fallen from more than 70% in 2000 to 59% today,” explained the Brookings researchers.
“Foreign reserves are not flowing into the dollar’s main competitors, the euro and the yen. Instead, reserves are going into what are sometimes called “non-traditional currencies,” such as the Canadian dollar, the Australian dollar and the Chinese renminbi. Aside from China, these are the currencies of stable countries with strong economies and close relations with the United States.”
Study by the Brookings Research Center.
In addition, central banks have also increased their gold holdings. This is a strategic shift towards the golden metal as a hedge against market volatility and geopolitical risks. This is especially true at a time when the US dollar has been losing ground to non-traditional currencies.