Forbidden fruit: Russia's uneasy relationship with the US dollar

ABSTRACT At the turn of the twenty-first century, Russia entered into a unique relationship with the US dollar: it became the only major country with both a highly dollarized economy and extensive dollar reserves. Russia also played a pivotal role in the international gas and oil markets, where resources are priced in and sold for US dollars. This paper argues, however, that three trends had converged by 2006 to challenge the US dollar's pre-eminence in Russia. First, President Vladimir Putin's efforts to strengthen the state required reasserting Russia's monetary sovereignty. Second, opposition to US foreign policy and a re-emergent Russian nationalism prompted many politicians to denounce Russia's dependence on the dollar. Finally, the dollar's increasing weakness internationally led Russian economic officials to worry that over-reliance on the dollar threatens Russia's economic stability. This relative weakness also encouraged ordinary Russians to rethink their relationship with the dollar. Together, these three trends led to a political anti-dollar campaign, gradual reserve diversification away from the dollar, and moves to substitute rubles or euros for dollars in domestic pricing, sales, and savings. This paper explores these trends and discusses their potential ramifications for the international dollar regime.