Both China and Russia are heavily dependent on American dollars for their exports. Russia's primary export is petroleum and natural gas, while China exports large quantities of consumer goods to American markets.
The real risk for both countries is in their foreign exchange reserves -- with China holding 32 percent of its $4 trillion in reserves and Russia holding almost half of its $400 billion in reserves in dollar-denominated assets. Fluctuation in the American dollar has the potential of severely damaging their total reserve value.
While the treaty coming into force this week only represents CNY150 billion (about $24 billion) in foreign exchange reserves, it is a significant step forward in both countries' efforts to ditch the dollar.
What makes this currency swap special is that it is happening during one of the worst currency crises since the collapse of the Soviet Union.While the deal for the currency swap was arranged in October with a transaction date of December 29, both countries are winning from the swap. For Russia, it adds confidence in the ruble and increases their reserves in foreign hard currency. For China, any move to increase trade with Russia represents a huge win for their economy, which has suffered from decreased American spending on consumer goods.
Since 2009, China has made currency swaps with over 28 central banks in a move to make the yuan a viable alternative to the dollar in world trade.
Closer to home, Americans should be more interested in the CNY200 billion currency swap with Canada with the inauguration of the FIPA treaty -- and the reality that we could potentially lose the favored status we have with our biggest trading partner in North America.
American politicians need to spend less time wrangling on the ideological catch-phrases and more time actually doing something to protect American trade and our currency's place as the world reserve currency. The time to do something is now --by strengthening relationships with trading partners, being active in developing countries, and having a foreign policy that attracts foreign investment.
The finer points of liberal or conservative dogma won't mean much if we allow our own currency to become a second rate standard in the world.