Choice of a substitution currency in Russia: How can we explain the dollar's dominance?

The analysis of Russia's external economic relations reveals a paradox: while Europe is its main trade and direct investment partner, its currency's role in the Russian financial sphere is lower then that of the US $. This paper analyses this phenomenon by separating the currencies' use for transactional purposes from their role as a 'store of value'. The influence of three main factors (habits, trade relations and exchange rate fluctuations) on the relative demand of the euro in Russia is tested for the period 1999-2004. Finally, we suggest a theoretical interpretation of the results using the conventions theory approach.