Russia May Copy China to Rescue Economy—But It's Unlikely to Succeed

A lawmaker in Russia has proposed copying China's model of having two versions of its currency—for internal and external use—to ease the volatility of the ruble. However, one financial expert has told Newsweek that China's system can't be applied to Russia's very different economy.

Since the start of Vladimir Putin's full-scale invasion of Ukraine, Russia's currency has gone through periods of turbulence, slumping to below 150 to the U.S. dollar soon after the start of the war, before recovering after Russia's central bank imposed strict capital controls.

In August, the ruble dropped below the psychologically significant mark of 100 to the greenback, its lowest in over 16 months, spurring the central bank to hike interest rates from 8.5 percent to 12 percent. As of Wednesday morning, the ruble was trading at just over 96 to the dollar.

Western sanctions have prompted Moscow to seek payments from so-called "friendly" countries in either rubles, or one of the currencies of the BRICS countries, thereby avoiding the dollar and the euro.

But problems for the ruble continue and Russia's minister of economic development, Maxim Reshetnikov, proposed following the path of China, which uses different versions of its currency, the yuan, for internal and external use. He also called for controls on the transfer of rubles abroad.

Reshetnikov told Russia's Federation Council on Monday that simply introducing the mandatory sale of foreign currency earnings by exporters would not stabilize the currency because sales are already at a high level.

"We probably need to do some kind of version of the Chinese model," he said, in which there is a barrier or "membrane" separating "the domestic ruble market and the external ruble market."

"We are discussing it with the central bank," Reshetnikov added, clarifying that his proposal is "not a question of two rates" for the currency, which would be "extremely harmful." Rather, he said: "We must establish clear monitoring and a clear understanding of how many rubles we have circulating abroad and how they get there," according to state news agency Interfax.

While still just a proposal, creating a version of the Chinese currency system may not work for Russia. "China's exports and export partners are very diversified, so a separate currency works for them," said Chris Weafer, chief executive officer of strategic consultants Macro Advisory Ltd.

"But Russia's economy is considerably smaller and exports are mostly either linked to global reference pricing in U.S. dollars and to relatively few countries," he told Newsweek. "In effect, Russia already has that dual currency system with the ruble and the U.S. dollar."

The ruble has devalued steeply this year—down 26 percent, which has made imported goods more expensive and costs for foreign holidays have risen steeply.

"But this does not affect the majority of Russians who buy local or Asian import goods and do not travel outside the country," said Weafer. "The weak ruble has helped the budget survive the lower oil receipts as it allowed the lower dollar amount to be translated into the higher ruble amount."