Insight
Russia may ditch the dollar – but it needs the euro by Zach Meyers, 29 March 2022 Naysayers claim Western financial sanctions will speed Russia and China’s drift away from Western currencies and finance. But the West’s predominance in the global financial system is enduring. Western nations have imposed severe sanctions on Russia in response to its invasion of Ukraine. The most immediately disruptive sanctions targeted the Russian financial system, impairing Russia’s ability to trade internationally and freezing around half of its nearly $600 billion foreign reserves. Critics of these sanctions argue the West is self-sabotaging, for example by reneging on the institutional promise that Western central banks will always honour claims against them and by politicising Western financial systems. They argue Russia, and other countries wanting to insure themselves against Western sanctions, will simply use their own currencies and payment systems, making future sanctions less effective. On cue, Putin has announced that Europe must now pay for Russian gas with roubles rather than euros. At the same time, Russia is pushing India to start paying for its gas in euros rather than dollars. This illustrates Russia’s dilemma: it cannot escape Western currencies. Western critics of financial sanctions miss a crucial point. To retain their international position, the West’s financial institutions and currencies do not need to be apolitical. They just need to be less politicised than the alternatives. Russia’s trade depends on Western currencies Start with how Western sanctions harm Russia’s trade. US financial sanctions excluded Russia’s largest bank, Sberbank, and the Russian central bank from clearing payments in US dollars, and froze the US assets of other important Russian banks. The US sanctions make it harder – though not necessarily impossible – for Russia to deal with US dollars. Any cross-border transaction in US dollars will, at some point, use a US intermediary bank and rely on US settlement systems, and therefore be susceptible to US sanctions. Russia has long been aware of the risks of using US dollars for its trade. It has successfully promoted the rouble’s use in transactions with other members of the Commonwealth of Independent States (CIS) like Belarus. However, Russia has not, until now, insisted on using the rouble for trade outside the CIS. CER INSIGHT: Russia may ditch the dollar – but it needs the euro 29 March 2022
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