The Russian economy faces an increasingly pressing problem. Supplies are running out, and it’s impossible to replenish or replace many kinds of products. They can’t just be imported: following Russia’s invasion of Ukraine, even Russian companies that have not been directly sanctioned still run into major difficulties when trying to settle their accounts with foreign partners. Their bank accounts in dollars and euros may be blocked, payments sent in foreign currencies take an age to be processed, and even banks in “friendly countries” are refusing to carry out transactions, citing a range of excuses.
Russia’s financial authorities are actively seeking ways around these problems, entertaining even the most outlandish ideas, but for now, the range of proposed solutions looks extremely limited and archaic. It’s hard to work out something more effective when there are political restrictions laid down by President Vladimir Putin on the one hand, such as his requirement for trade to be done in rubles, and the long-established reality of global trade on the other, based first and foremost on the convenience of the dollar and euro.
Officials are counting on being able to start trading in national currencies. For now, however, only a handful of companies have announced one-off deals fixed in rubles. “Friendly” Turkey has agreed to a partial payment for Russian gas in rubles, but neither the mechanism for doing so nor the volumes in question are yet known. Turkey’s adaptability appears to be linked to the fact that Ankara is Moscow’s key partner right now in terms of parallel imports, meaning many Turkish companies will in any case be actively using rubles.
In theory, the ruble remains a freely convertible currency with all the necessary infrastructure for transnational payments, so there is technically nothing to stop Russian exporters from demanding payment for their goods in rubles. In practice, however, this simply doesn’t work, and only leads to even more delays in completing transactions.
The key problem here is in the low liquidity of national currencies compared with reserve currencies, as well as the macroeconomic and exchange rate risks. Because of this, buyers ask for significant discounts for agreeing to a deal fixed in an unusual currency. The banking systems of various countries are used to working with reserve currencies in foreign trade, and do not open accounts in other currencies unless it is absolutely essential. In 2014, for example, Gazpromneft sold 80,000 tons of oil in exchange for rubles, but the experiment never caught on.
Reserve currencies are simply more convenient for trade than national currencies. It’s more profitable for exporters to be paid in a currency they can then use to pay for as many various kinds of imports as possible. Unlike reserve currencies, national currencies are hard to use when trading with other countries. While it’s technically possible, Chinese companies are not going to use Russian rubles to buy goods from Turkey, just as Russian companies are not going to pay with Turkish lira when trading with India.
In addition, a greater role for the ruble in international trading could create extra problems for the Russian financial authorities. Once a national currency becomes significant in international trade and starts being used more abroad, the country of its origin loses some of its control over the exchange rate.
For these reasons, Russia will likely only be able to trade successfully in rubles with countries for which it is already a creditor, i.e., the Central Asian nations and individual African states. Now loans to those countries will be issued in rubles instead of dollars.
Another way of getting rid of reserve currencies from foreign trade is barter, something to which the Russian Finance Ministry has recently turned its attention. Officials have floated a diverse range of ideas, from an exchange of goods worth equal value, to offset deals when a foreign partner exports goods on behalf of a Russian company and then provides this company with goods worth the same amount.
None of these formats, however, are suitable even for the domestic market, never mind foreign trade. Exchanging goods for other goods would have to be manually accounted for, which would create major difficulties for any large or technologically advanced businesses using automated accounting systems.
Bartering also entails difficulties for the state: if goods are exchanged for other goods, how should taxes be calculated on that deal? It also creates the temptation (as well as a convenient mechanism) to lower the cost of goods and services.
Aware of the complications of bartering, Russia’s central bank is also considering other options for international trade, including the use of cryptocurrencies. The government has even started drawing up legislation to enable operations to be carried out in cryptocurrencies. But here, too, Russian companies will find it difficult to get around injunctions imposed by U.S. regulators.
The U.S. Treasury has already warned crypto trading exchanges that there will be consequences for helping Russian companies to circumvent sanctions. The largest platforms, such as Binance and Coinbase, have introduced restrictions for Russian traders.
The problem here, however, is not only Western restrictions but also the volatility of cryptocurrencies, which makes them unsuitable for the denomination of prices. Their use to settle accounts would also require a crypto exchange with a good reputation and sufficient capacity. Finally, the cryptocurrency market is currently undergoing an unprecedented drop that could spark a radical reassessment of the currencies’ values.
Other outlandish ways of moving away from trading in dollars and euros are also being floated, such as: a return to the gold standard, the creation of stablecoins (cryptocurrencies pegged to a basket of commodities-based currencies), and even the launch of a gold crypto-ruble pegged to the global price of gold. Admittedly, all of these proposals have the same drawbacks: high volatility and major doubts over whether their holders will be able to pay anyone aside from Russia with them.
While the Russian authorities and companies are inventing new ways to stop relying on the dollar and euro, the Russian economy is increasingly turning to the yuan. Its use in trade volumes on the Moscow stock exchange in July amounted to 20 percent in contrast with no more than 0.5 percent in January, taking it ahead of other currencies of “friendly countries” by a wide margin. Meanwhile, Russian banks are also starting to use China’s Cross-Border Interbank Payment System (CIPS) for international payments.
Right now, there are not enough yuan in Russia for both trade and sterilizing profits from energy exports. More yuan could be made available through a currency swap that would enable Russia’s central bank to top up its reserves of yuan liquidity from its Chinese counterpart, the People’s Bank of China, but that’s something Beijing is unlikely to agree to: it could be seen as providing financial support to Russia, which could land China with secondary sanctions. Russia tried to persuade China to agree to a currency swap back in March, but to no avail.
Moscow could achieve the same result by requiring Western countries to pay for energy imports in yuan instead of rubles, but China won’t agree to loosen the capital controls limiting the movement of its currency abroad just for Russia’s convenience. Increasing the volume of the offshore yuan would make it harder for the Chinese central bank to manage the exchange rate, plus a separate window for Russia could be exploited to take capital out of China to other countries via Russia. In any case, China, being closely integrated into Western production chains, is very wary of the risk of being sanctioned.
It’s hard to imagine Moscow being able to convince the rest of the world that its attempts to reinvent the global monetary system are an improvement on the tried and tested convenience of reserve currencies. Accordingly, Russian companies that want to keep trading with the outside world will have to accept all the additional risks and expense inherent to barter deals, payments in national currencies, and other sometimes dubious schemes to avoid using the dollar and euro.
