The Ruble and the Yuan

The US and its European allies moved to bury the Russian economy under thousands of sanctions over Russia’s “special military operation” in Ukraine. 

And Russia saw its currency sank to a record low of 121.5 rubles per USD, triggering memories of the battering it took during the 1998 Russian financial crisis. 

In fact, US President Joe Biden boasted the success of the sanctions – some of the toughest ever imposed on a nation – while he visited Poland March 25, 2022. “The ruble almost is immediately reduced to rubble”, Biden had trumpeted. 

Sure, it hurt Russia for a time – but the ruble, a widely followed indicator of the economy has recovered all of its earlier losses. The ruble surged all the way back to where it was before Russian forces went into Ukraine, closing at 79.7 in Moscow on April 06. And yesterday, the ruble traded at 78.625. 

But more than that, Russia’s exclusion from the global currency system is an opportunity for China to raise the profile of its currency in a challenge to the US dollar. After all, China does not support Western sanctions – and therefore, access to the yuan remains open, making it a potential currency alternative. 

“The use of Chinese currency will inevitably expand and play a much bigger role in the world”, Baizhu Chen, professor of clinical finance and business economics at the University of Southern California had asseted. “Some countries feel their economies could be held hostage to US policies because the dollar is dominant, and countries want to diversify their risk”. 

Good for them because these countries have woken up. Already, upwards of 70 central banks hold some yuan as a reserve currency, while many African countries and some in the Middle East regularly use it for transactions, he had noted. 

Russian banks are reportedly seeing sharp increases in the Chinese yuan in their clients’ accounts as the sanctions limit access to the dollar and euro. According to a March survey conducted by Russian financial daily Kommersant, large banks have seen a spike in funds being converted from dollars and euros into yuan. And new accounts are also being opened with yuan. 

The International Monetary Fund even admitted that the US dollar’s global standing as the top reserve currency has lost ground to the Yuan and others. The IMF noted that the dollar has been steadily offset as reserve managers primarily move into two alternative directions, with a quarter turning to the yuan and three-quarters exploring non-traditional currencies from nations that typically play limited roles as reserve assets. 

Notwithstanding the above, the US dollar and euro still remain dominant worldwide. 

At least, for now.