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Russia could join China to save the economy – but it is unlikely to succeed

A lawmaker in Russia has suggested copying China’s model of having two versions of its currency – for internal and external use – to reduce the ruble’s volatility. However, a financial expert told Newsweek that China’s system cannot be applied to Russia’s very different economy.

Since Vladimir Putin’s all-out invasion of Ukraine began, the Russian currency has experienced periods of turmoil, falling to below 150 against the U.S. dollar shortly after the start of the war, before recovering after Russia’s central bank imposed strict capital controls.

In August, the ruble fell below the psychologically significant 100 mark against the greenback, its lowest level in over 16 months, prompting the central bank to raise interest rates from 8.5 percent to 12 percent. On Wednesday morning, the ruble was trading at just over 96 to the dollar.

Russian ruble coins and a banknote on a Russian ruble sign. A Russian lawmaker has proposed two versions of the currency to stabilize it. Getty Images

Western sanctions have led Moscow to demand payments from so-called “friendly” countries in either rubles or one of the BRICS currencies, shunning the dollar and the euro.

But problems for the ruble remain and Russia’s economic development minister, Maxim Reshetnikov, suggested following the path of China, which uses different versions of its currency, the yuan, for internal and external use. He also called for control of ruble transfers abroad.

Reshetnikov told Russia’s Federation Council on Monday that simply introducing mandatory sales of foreign exchange proceeds by exporters would not stabilize the currency as sales were already at a high level.

“We probably need to develop some kind of version of the Chinese model,” he said, in which there is a barrier or “membrane” that “separates the domestic ruble market from the external ruble market.”

“We are discussing this with the Central Bank,” Reshetnikov added, clarifying that his proposal “is not about two exchange rates” for the currency, which would be “extremely harmful.” Rather, he said: “We need to create clear monitoring and understanding of how many rubles we have circulating abroad and how they get there,” according to state news agency Interfax.

Although still just a proposal, creating a version of China’s monetary system might not work for Russia. “China’s exports and export partners are very diversified, so having their own currency works for them,” said Chris Weafer, chief executive of strategic consultancy Macro Advisory Ltd.

“But Russia’s economy is significantly smaller and exports are mostly tied either to global reference prices in U.S. dollars or to relatively few countries,” he told Newsweek. “In fact, Russia already has this dual currency system with the ruble and the US dollar.”

The ruble has lost a lot of value this year – by 26 percent, making imported goods more expensive and the cost of traveling abroad rising sharply.

“However, the majority of Russians who buy local or Asian imported goods and do not travel abroad are not affected,” Weafer said. “The weak ruble helped the budget weather lower oil revenues as it allowed the lower dollar amount to be converted into the higher ruble amount.”

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