US Witnesses The De-dollarization of The Global Economy (#GotBitcoin?)
Russia Demotes Dollar’s Role at Home, Taking a Swipe at U.S.
To ease sanctions pressure, Moscow promotes use of ruble and other currencies in trade deals.
Russia is trying to wean itself off the greenback as its economy buckles under U.S. sanctions and the country prepares for stricter penalties expected later this month.
Russia’s central bank has ramped up its gold reserves this year and sold U.S. Treasurys. Now plans are under way to execute more trade deals in rubles and other currencies, and tax incentives are being considered for exporters that shun the dollar.
The so-called de-dollarization process, backed by President Vladimir Putin and Russia’s central bank, should help soften the blow if new Western sanctions target the financial system.
For the Kremlin, the effort is a not-so-subtle retaliation against Washington’s injunctions, and is part of its broader efforts to inoculate the economy by spurring local production and investment as well as strengthening ties to China. Mr. Putin last month called the U.S. sanctions policies a “colossal strategic mistake” undermining confidence in the dollar as a universal currency, the official Russian news agency, TASS, reported. “They are sawing the branch on which they sit.”
Officials say Moscow isn’t planning to ban the use of dollars or dollar-denominated debt. But even diversifying away from the greenback is a tall order, analysts say.
The dollar is involved in nine out of every 10 transactions in the daily $5 trillion foreign-exchange market and the majority of global debt is in dollars. Wild swings in the ruble in recent years have undermined confidence in the currency, while the Russian economy is heavily reliant on dollar-priced commodities such as oil, gas and steel.
Still, Russia is joining a growing number of countries pushing back against the hegemony of the American currency.
This March, China launched a yuan-denominated oil-futures contract that has rapidly gained popularity among oil traders. European Union officials have sought to bolster the role of the euro and openly discussed setting up a new payment system independent of the U.S. Iran, which faces even broader U.S. sanctions than Russia’s, has also moved to limit the role of the dollar, as have Venezuela and Pakistan.
“It’s not clear how much of this [de-dollarization] trend is poker games, but the unpredictability of current U.S. foreign policy means that more countries need to question things that have never been questioned before,” said Thomas Flury, head of foreign-exchange strategies at UBS Global Wealth Management.
In Russia, the de-dollarization push has been driven by fears that future U.S. sanctions could cut off local banks and exporters from the U.S. financial system. A spate of Western sanctions since 2014, following Russia’s annexation of Crimea from Ukraine, has already hit the economy, reduced investment and crippled aluminum giant United Co. Rusal PLC.
Russia will “stop using the U.S. dollar and will use our national currency [and] other currencies, including the European currency,” Russia’s Finance Minister Anton Siluanov said on state television in August. “So, as a matter of fact, these restrictions will backfire at the Americans.”
Additional U.S. sanctions could be imposed as soon as this month as punishment for Moscow’s alleged nerve-agent attack in March against a former Russian spy in the U.K. Congress is also considering further penalties on Russia’s financial system and its banks.
Moscow is expected to publish its de-dollarization plan by the end of the year. Officials say the plan, originally conceived by the head of the sanctioned state bank VTB, Andrei Kostin, will include tax credits and other incentives for firms using the ruble such as expedited value-added tax returns.
Already, the dollar’s role in the Russian economy has been shrinking. The share of foreign-currency deposits held by individuals and firms in Russian banks has fallen to 26% this September, from a 2016 peak of 37%, according to Wall Street Journal calculations based on central-bank data. And the share of dollar-priced export revenues fell to 68% in the second quarter of this year, from over 80% in 2013, central-bank data shows.
Russia’s fast-growing trade with China is a case in point. The share of trade priced in rubles and yuan has nearly quadrupled in four years to around 19% of their bilateral trade and will continue to expand, according to Dmitry Dolgin, Moscow-based economist at ING Bank.
Russian officials have also proposed using national currencies for trading oil with countries such as Iran and Turkey, though little has come of these efforts so far.
Some Russian companies are also dipping into the de-dollarization fray.
Alrosa Group, the world’s largest diamond producer, has recently piloted ruble deals with Indian and Chinese customers. To avoid exchange-rate volatility, it executed those transactions within a few hours, the company said.
“We are considering opportunities to expand this pilot to other countries or currencies,” said Alrosa spokeswoman, Evgeniya Kozenko.
Still, ditching the dollar is easier said than done.
Though Russia’s non-dollar trade is poised to grow, businesses will be reluctant to incur greater costs than competitors who are using the dollar, according to Jason Bush, senior analyst at Eurasia consultancy.
Analysts also say that the push to de-dollarize is partly political rhetoric aimed at responding to the deepening chill in relations with the West. The structure of Russia’s economy, where dollar-priced oil and gas sales bring in around 40% of budget revenues, will limit such initiatives.
“De-dollarization is a hot topic and the banks will help to facilitate this,” said Richard Segal, emerging-market analyst at Manulife Asset Management. “But because the economy is so commodity-based, I doubt there will be a major long-term push.”
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