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“The freezing of the Russian central bank’s reserves, a thunderclap on the monetary planet”

Chronic. The Russian invasion of Ukraine and the salvo of economic sanctions that followed will upset the international financial system in the medium and long term, even if the uncertainties about the evolution of the conflict should encourage caution on the extent of possible changes. On Saturday, February 26, Westerners thus decided to freeze the reserves of the Russian central bank held abroad with other monetary institutions, such as those in the euro zone. By prohibiting it from dipping into this war chest, Americans and Europeans want to prevent the Russian central bank from defending the ruble in the face of the economic and financial crisis into which the country is about to plunge.

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This unprecedented measure is a thunderclap on the monetary planet. It will leave traces. It means that the security of a country’s reserves held abroad is not guaranteed. They can be held hostage to sanctions, especially from Washington – because they are still largely held in dollars, at 59% of all the world’s foreign exchange reserves, according to the International Monetary Fund ( IMF). Far ahead of the euro (20.5%).

After the Asian crisis of 1997, many emerging countries considerably inflated this loot, in order to be able to protect their currencies in the event of a crisis. Will the sanctions targeting the Russian central bank encourage some to diversify their reserves – for example by turning to gold or the yuan – in order to shield them from American influence? Without doubt.

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Especially since, in recent years, the United States has also taken advantage of the dominant position of the greenback to impose fines on foreign companies trading – in dollars – with certain States. Like BNP Paribas, condemned in 2014 by Washington to pay 9 billion dollars for having circumvented American embargoes in four countries, including Iran.

Rise of the yuan

Since the invasion of Crimea in 2014, Russia has begun to diversify its reserves, in particular by increasing the share held in yuan. It has also developed its own financial communication system, the SPFS (“financial message transfer system”), in order to reduce its dependence on the Western Swift network, from which seven of its banks were excluded at the beginning of March. The SPFS already accounts for 20% of payments made in Russia and is used by a host of banks in the former Soviet bloc.

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China does nothing else. Since 2005, it has slowly internationalized its currency in order to support the rise of its economy, while de-dollarizing it. In 2010, Chinese companies were allowed to pay for their imports and exports in yuan – until then, they did so in dollars. In the process, the government made Hong Kong the first offshore center of its currency, by authorizing a subsidiary of the Bank of China to pilot the offer of the yuan there internationally. This has allowed the development of a host of financial services and products around the Chinese currency, such as investment advice, asset management, and above all, bond issues in yuan. Finally, Beijing has accelerated in recent months the deployment of the e-yuan, its digital currency likely to eventually replace coins and banknotes.

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