As Russia looks to develop a cross border CBDC, U.S. Treasury Secretary Janet Yellen responded to CNN questions this weekend about weaponizing the U.S. dollar through sanctions.
Yellen on weaponizing the dollar
Yellen argued that sanctions are effective in limiting Russia’s revenues and depriving it of resources, forcing it to resort to North Korea and Iran for new weapons. The news comes amid reports that Saudi Arabia and the UAE are buying discounted Russian oil products.
“There is a risk when we use financial sanctions that are linked to the dollar that over time it could undermine the hegemony of the dollar, as you say,” acknowledged the Treasury Secretary, speaking to CNN. “But this is an extremely important tool that we try to use judiciously.”
She recognizes it means Russia, Iran and China are looking for alternatives. However, she said the dollar is hard to replace because it has many properties that are difficult to replicate. Examples include the wide use of the dollar, deep U.S. Treasury markets with its government bonds considered as the safest assets, deep capital markets and rule of law.
“We haven’t seen any other country that has the basic institutional infrastructure that would enable its currency to serve a role like this,” she concluded.
Russia acknowledges ongoing USD dependence
A report published by Russia’s central bank acknowledged two of these points. Firstly, it found that despite sanctions for more than a year, almost half of import/export contracts are still denominated in dollars and euros, even if they are often settled in different currencies. “The U.S. dollar and the euro are often the currencies of choice for exporters from friendly countries,” it said.
This exposes Russia to additional currency risk if the settlement currency differs from the contract currency. All the more so because the currencies of Russian-friendly countries have limited or no convertibility (perhaps Iran). The report makes clear that the biggest currency beneficiary is the yuan. It says that trading in the yuan/ruble forex pair now exceeds that of the euro/ruble pair. But the USD/ruble is still stubbornly above a third of trading.
The report continues, “This means that the Russian economy will still need the currency of unfriendly states, which may gradually decrease with the development of import substitution in the medium and long term.” That addresses a second point made by Yellen – that the weaponization of the dollar may have an impact over time.
Russia’s cross border CBDC
Meanwhile, during remarks to Russia’s parliament last week, Elvira Nabiullina, the Governor of the Bank of Russia commented, “one of our priorities is the development of a system of international settlements. I won’t dwell on it, but it’s really very important.”
In January, it was reported the central bank planned to start work on cross border central bank digital currency (cross border CBDC) last quarter, exploring both bilateral interlinking and a shared platform that supports multiple CBDCs.
The highest profile shared platform is Project MBridge, a project from the BIS and the central banks of China, Hong Kong, Thailand and the UAE.
India has a new collaboration with the UAE for cross border CBDC. Late last month during a visit to India, the Deputy Chairman of Russia’s Duma spoke about using digital currency for cross border trade, whether its a digital ruble, digital yuan or digital rupee.