Daily Management Review

Russia Proposes De-Dollarization of CIS


Russian President Vladimir Putin submitted to the State Duma a bill that requires the rejection of the dollar in the CIS, which means the creation of a single financial market between Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan and other countries.

Xinhua/Reuters Photo
Xinhua/Reuters Photo
According to a posting on the website of the President of Russia, in the framework of the "Agreement on cooperation in organizing an integrated currency market of states - participants of the Commonwealth of Independent States", the union is going create a mechanism that will allow to abandon Dollar and Euro as a currency in the intermediate calculations.

The Agreement provides a direct admission for banks –residents of the parties - to the domestic markets of each other for interbank forex transactions on terms no less favorable than those provided by the national commercial banks. This will help expand the use of national currencies in payments in the field of foreign trade and financial services and thus create conditions for increasing the liquidity of the national currencies markets.

As a result, conditions, under which markets will get the maximum development of national currencies, will be created. There will be conditions for a harmonized monetary policy, aimed at creating further opportunities for long-term strategies of trade-economic and investment cooperation, as well as to achieve overall macroeconomic stability in the region.

The ratification and subsequent implementation of the agreement should contribute to the revitalization and further development of economic cooperation, as well as the deepening of integration processes within the CIS.

Within the framework of the EAEC, the countries have already discussed the possibility of switching to national currencies. According to the agreement between Russia, Belarus, Armenia and Kazakhstan, transition to settlements in the national currency (Rubles, Belarusian rubles, Tenge and Dram) must occur in 2025-2030.

This proposal is contained in the development of payment systems in the EAEC, approved by countries of the Union in December 2014.

Now almost 50% of the payment transactions between the countries of the EAEC falls on dollar and euro, which increases the dependence of the Union on the countries issuing the currency. The project proposes to completely eliminate the use of Dollar and Euro in the EAEC.

Until the twentieth century, the value of money was tied to gold.

Banks were restricted to their gold reserves, so credit growth had its limits.

But in 1944, the Bretton Woods system was created, which initiated the system of exchange rates.

Within the framework of the Bretton Woods system, exchange rates of currencies were pegged to Dollar, and in turn, Dollar - to gold. Capital movement was severely restricted to prevent speculation on pegged currency. For two decades, this system was accompanied by rapid economic growth and helped to avoid any major financial crises.

But in the end, it showed their inability to cope with the growing economic power of Germany and Japan, as well as the unwillingness of America to adjust its domestic economic policy while maintaining linkage to gold. President Nixon canceled the linkage to gold in 1971, and the system of fixed exchange rates collapsed.

At the time, the dollar experienced a period of a collapse, and the oil played a decisive role in its support. Nixon held talks with Saudi Arabia, and, in exchange for weapons and protection, agreed to sell oil only in US dollars.

Other OPEC members have supported this system, providing a perpetual global demand for US currency. And petrodollar dominance continues to this day. At the same time, the US currency has become a major in international payments for any product or service.

Russia and the global de-dollarization

Russia is actively moving towards abandoning the dollar, but mostly due to the actions of China.

Russia and China are now the main countries that practice the rejection of the dollar. The biggest threat to the petrodollar is connected with the biggest energy deal in history between Russia and China. All payments under this agreement will be carried out in rubles and yuan. And from this moment, Russia is also involved in the creation of similar agreements with other buyers of fuel.

Nevertheless, the dollar has been and remains the dominant currency in international trade. Yet, times are changing. If, during the formation of the Eurozone, dollar's share peaked at 71% of the total official foreign exchange reserves, it fell to 62.9% in 2014.

The dollar is slowly losing its status as the undisputed global reserve currency.

Fewer countries and organizations are using the dollar in international transactions, and it gradually reduces the hegemony of the US currency.

More recently, China and South Korea have signed a major agreement, which makes it easier to trade with each other using their national currencies. Even the French officials now speak of the need to use the euro instead of the dollar.

Yet in 2010, the United Nations in its report pointed out that it is necessary to abandon the dollar as the sole reserve currency.

Council of the Gulf Cooperation expressed a desire to create its own reserve currency, not to mention the huge amount of foreign exchange swaps, operating worldwide.

The most activity here is also applied to China. That is, the central banks, with which China has signed currency swaps, may grant loans to its banks in RMB.  

On the part of the Chinese authorities, there is traced a fairly clear course for the creation of currency swap lines to developing countries, as well as trade partners, mainly from the Asia-Pacific region. Among the partners in the transactions are China, Australia, New Zealand, Brazil, Singapore, Hong Kong, Thailand, Argentina, Malaysia and other countries.

The total number of concluded swap agreements now exceeds 20, and their volume is about 4 trillion yuan.

Currency swap agreement with Russia in the amount of 150 billion yuan ($ 25 billion) is one of the steps of the implementation of China's ambitious plan to strengthen the role of the yuan. Also, foreign exchange swaps can be considered as one of the measures that will make Ruble and Yuan more stable, which in turn will have a positive impact on the stability of the global financial system.

Now more than 10 thousand financial institutions are working with the Chinese yuan, compared with 900 in 2011. The offshore operations with the yuan is estimated at $ 143 billion. The share of China's exports and imports, denominated in RMB, increased almost six-fold in the three years up to 12%.

source: sputniknews.com