Exorbitant Privilege and Economic Sanctions

Abstract

This paper examines the impact of economic sanctions on the choice of invoicing currencies in international trade, focusing on the sanctions imposed on Russia following its full-scale invasion of Ukraine in February 2022. Using transaction-level data on Russia’s imports from 2016 to 2023, we document a significant shift away from US dollar (USD) invoicing toward increased use of the Chinese renminbi (CNY), particularly in trade with China and other neutral economies. By the second half of 2023, the CNY accounted for over a third of Russia’s import value, up from less than 4 percent in 2021. Employing a difference-indifference approach, we identify several mechanisms driving this shift: geopolitical alignment, financial infrastructure such as currency swap lines with the People’s Bank of China, the threat of secondary sanctions, and rising transaction costs in Western currencies. Strategic complementarities and the exit of Western firms further accelerated this currency switching. Our findings suggest that trade sanctions, beyond reshaping trade flows, also contribute to fragmentation in the international monetary system, with long-term implications for the dominance of the USD in global commerce.