Complete de-dollarization in Russia is 'impossible and irrational,' former Kremlin minister says

• It's impossible for Russia to completely abandon use of the the dollar, a former Kremlin official wrote.
• A narrowing currency market in Russia has fueled ruble volatility.
• Russia could be less reliant on the dollar if it creates a new infrastructure for exchange settlements.

Hopes of completely cutting the greenback out of Russian exchange rate markets would be unattainable, a former minister of finance wrote in a local opinion piece.

That's as the dollar continues to be used for trade that Moscow relies on, Mikhail Zadornov said, despite a narrowing foreign currency market in Russia.

"But whatever the pace of de-dollarization, we will not completely abandon trade settlements in 'hard' currencies — even for gas, Russia continues to receive in foreign currency," he wrote. "That is, complete withdrawal from dollars and euros, their absence in the domestic market —  it is both impossible and irrational."

Russian de-dollarization accelerated as a consequence of the sanctions imposed by the US and EU in 2022. As a result, Zadornov cites a turnaround in the composition of Russia's foreign FX markets: 

"Until 2022, turnover in the currency section of the Moscow Exchange was two to three times higher than now, and secondly, 80–90% of the market accounted for dollars and euros. Now a third is dollars, 10% is euros, a third is yuan, the rest are various currencies," he summarized.

Though Zadornov lists this as a secondary reason, the contraction in the dollar exchange market was a contributing factor in the ruble's dramatic slide. The currency is currently hovering at over 96 to the dollar. 

Still, Russia continues to be a participant in global trade, meaning that it must keep working with the dollar. With less of the currency available in the country, large trade transactions generate higher demand for the greenback, generating ruble volatility.

To stem this, Zadornov suggested a new infrastructure that would facilitate direct and exchange settlements between "friendly" currencies.

"The emergence of new instruments in itself will help strengthen the ruble against the dollar and the euro, since direct settlements do not require the use of these currencies for cross-currency transactions, thereby reducing the demand for 'hard' currencies," he wrote.

In the same article, Zadornov also named other reasons for the ruble's slide, including Russia's irredeemable stockpile of rupees. Kremlin officials opposed the idea, citing that issues with rupee conversion have little impact on the ruble.