In the Russian government’s latest move to reduce its reliance on a global financial system dominated by the United States and its allies, Kremlin authorities Monday began a policy of barring the use of U.S. dollars as collateral for transactions on the Moscow Exchange, Russia’s largest financial services marketplace.

According to experts, the change was more symbolic than practical, because a broad slate of sanctions imposed on Russia over its expanded invasion of Ukraine have made it almost impossible for Russian businesses to make dollar-based transactions. The change comes just a few weeks after the Moscow Exchange reduced the acceptable percentage of U.S. dollars in collateral from 50% of total value to 25%.

Still, the change underlines Moscow’s efforts to chart a path through the maze of economic barriers constructed by the U.S. and its allies over the more than six months since the invasion began. Kremlin officials have called on Russian businesses and individuals to divest themselves of “toxic” currencies issued by governments that have acted to thwart President Vladimir Putin’s efforts to expand Russian territory by force.

“The blocking of Russian assets by unfriendly countries, as well as operational restrictions on settlements in the world’s major reserve currencies, create risks for citizens and businesses when using the U.S. dollar and the euro,” the Russian central bank said in a statement issued last month.

Heavy sanctions

In the days after Russian troops crossed into Ukraine in February, the U.S. and its allies, including most of the European Union, Canada, Japan, Australia and almost all other major Western economies began applying unprecedented economic pressure in an effort to get Putin to reverse course.

A large portion of the assets of the Russian central bank held overseas were frozen, as were the assets of many wealthy Russian businesspeople. U.S. banks were effectively barred from doing business with Russian businesses, with some exceptions for energy payments, which had the result of cutting Russian firms off from the dollar-based transactions that represent a large share of global commerce.

Russian banks were eventually barred from SWIFT, the global messaging network that international banks use to settle cross-border transactions, and export controls have made it difficult for Russia to purchase high-end electronic components and other goods essential to operating a modern economy in the 21st century.

Faulty assumptions

The Kremlin may have been surprised by the unity with which the U.S. and its allies acted. Experts said that Russian leaders likely assumed that it would be cut off from the dollar after invading Ukraine — indeed, Russian has, for years, been taking steps to insulate itself from the dollar.

However, the Kremlin did so on the assumption that other global currencies, primarily the euro, but also the Japanese yen and the British pound, would remain available to it.

“What’s so important to understand about this is that Putin and Elvira Nabiullina, the central bank governor, truly believed that it was OK to be less reliant on the dollar, because they could diversify into euros and other currencies,” Josh Lipsky, the senior director of the Atlantic Council’s GeoEconomics Center, told VOA.

But the world’s seven leading industrialized democracies, the G-7, remain firm on sanctions, and have pledged solidarity with Ukraine.

“What surprised them was the unity amongst the G-7 — that the dollar and the euro and the yen and the pound were acting in tandem,” Lipsky said. “And that gave them no other outlets.”

Other markets

While Russia has found itself largely blocked from doing business with much of the world, a set of exceptions has been put in place that allow the Kremlin to continue selling energy products, primarily oil and gas. Those sales, boosted by months of abnormally high energy prices, have helped Russia avoid the worst potential consequences of its economic isolation.

At the same time, Russia has been working to develop alternatives to its traditional trade and financial flows. Turkey, whose leader, Recep Tayyip Erdogan, has positioned himself as an intermediary between Putin and Western leaders, agreed earlier this month to pay for some Russian natural gas in rubles.

China and India, both major consumers of Russian energy, have both increased their purchases in the months since the invasion, settling transactions in their national currencies rather than in dollars, as is common on global markets.

However, even Russian officials have conceded that creating a system completely independent of the dollar is not feasible.

Commenting on his country’s growing relationship with China in June, Russian Ambassador to China Andrei Denisov said, “Full de-dollarization is impossible in principle, and no one is setting this goal, considering that the dollar is actually a tool, an accounting currency, means for international settlements and international payments.”

Bad options

Jeffrey Mankoff, a distinguished research fellow at the National Defense University and a non-resident senior associate with the Center for Strategic and International Studies, told VOA that while Russia may be able to make some transactions in non-dollar currencies, the practice is “suboptimal” at best, and the future looks bleak for the Russian economy.

“The problem is, there’s not really a good alternative to the dollar at this point,” Mankoff said. “There’s no other currency that is convertible to the extent the dollar is and has a deep liquid securities market behind it so that you’re not taking on big exchange rate risks by doing business in it.”

While the use of non-dollar currencies for settlement keeps cash flowing into Russian coffers, he said, “The problem is the money can’t really flow out. Or, it can’t flow out to buy the things that Russia needs, which are restricted because of sanctions.”

Russia cannot import many of the consumer goods that its citizens had been used to purchasing, which has eroded living standards. Additionally, Russia cannot import semiconductors and other high-tech components needed for domestic manufacturing operations.

In the end, Mankoff said, Russia’s options are starkly limited if it remains cut off from most global markets, and economic conditions are likely to get worse.

“Manufacturing, anything kind of high-tech related, and that includes military goods, is going to get harder and harder,” Mankoff said. “If this war is still going on six months or 12 months or longer from now, I think you’re going to see the impact of these restrictions increasing over time.”
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