Yevgeny Ivanov & Ashish Singh
Countercurrents | January 20, 2023
After the World War II, the role of the dollar has grown significantly in global trade. Since then, the American currency has been used not only for transactions in foreign markets but also for transactions within countries. The collapse of the USSR has made the dollar an informal tender (vs legal tender) across the territories of the former Soviet republics for many years. The similar situation happened in Zimbabwe when its national currency underwent severe inflation. Zimbabweans preferred the US dollar and other foreign currencies for their private purposes.
The strong position of the dollar rests on the economic potential of the US and the stability of the American nation compared to other countries. Furthermore, American financial management is skilled and experienced. Spreading the access to financial tools across the globe facilitated the US dollar expansion. The dollar has become not only the main currency of world trade but also the global reserve currency. Investments in the dollar made it possible to minimize losses during financial crises. Despite American economy sometimes plunges into recessions too, it recovers quite quickly.
The American currency enjoyed its hegemony since WWII. Decolonization entailed shrinking of the British pound and the French franc zones. Japanese yen is not a strong reserve currency because Japanese big corporations are interested in lower exchange rate to make their products more competitive at the global market. Only introduction of the euro as the single legal tender of the Eurozone created a feasible alternative to the American currency. However, the dollar entrenched deep enough to hold the leadership. In 2012-2014 the US dollar’s share in international trade varied around 50%, while the euro’s share was approximately 30%. Apparently, the US benefits from this. For instance, the US can impose sanctions on any country which trade with dollars and/or have dollar reserves. In 2022 Russia and its partners suffered from these tough measures. As the EU joined those sanctions the euro does not look like the safehaven for non-Western nations as well.
In recent decades, emerging economies such as Russia, India, and China have sought to reduce use of the dollar in international transactions. The de-dollarization is declared to be among the key goals of the BRICS organization. Asian states are looking for the ways to diversify currencies use. For example, China has agreed with South Korea, Indonesia, Malaysia,and Hong Kong to trade with the yuan. Also, Asian countries are expanding trade in national currencies signing bilateral agreements. Digital currencies are discussed as a possible solution as well.
The Central Bank of Russia has consistently reduced the share of the dollar in the country’s gold and foreign exchange reserves. Now Russia invests more in the yuan for both Moscow and Beijing follow the plans to get rid of the US dollar hegemony. Russia promotes the ruble as the regional currency. The ruble dominates within the Eurasian Economic Union which relies on national currencies mainly. Likewise, Russia advocates the idea to sell oil and gas for rubles. In 2022, Türkiye agreed to partially switch to settlements in rubles. The same maneuver was negotiated by Russia and India. Since 2022 countries are using the ruble and the rupee for trade settlements. Furthermore, countries created special accounts to dodge Western sanctions.
India can put efforts in finding alternate ways to bypass the dominant US dollar based financial system, which will make it possible for India to facilitate payments to Russia. Furthermore, India can increase its investments into Russian energy and resource assets, to generate dividend income in ruble. It has been argued that Indian exporters may find it difficult to get their payments from Russian buyers unless a rupee-ruble scheme, similar to an arrangement done with Iran during US sanctions on Tehran, is brought in quickly.
So, can Moscow and New Delhi replace the dollar completely?
The trade turnover between Russia and India is relatively small for such sizable economies. In 2021, the trade turnover between two states was $13.5 billion. Russian exports to India were $9.1 billion, Indian to Russia $4.4 billion. So, India ranked only 14th among Russia’s trading partners. Western sanctions and Russia’s consequent Turn to the East are changing the situation dramatically. Moscow and New Delhi are revealing their trade potential. However, it is limited by the very sanctions. In part, imposed restrictions can be avoided by switching to settlements in national currencies —the ruble and the rupee.
We have already mentioned the benefits of switching to national currencies. What about challenges? Since Russian exports exceed India’s, under a full-scale transition to the ruble-rupee pair India will need to purchase Russian currency in a larger volume than Russia will accumulate rupee on its accounts. Therefore, to make it beneficial to both sides, Russia should increase import from India. After breaking ties with the Western counterparts, Russia seeks new suppliers of many items. In this case, India will have to look for suchniches to occupy. Has India willingness and resources to intensify trade relations so much? It is not clear by now. At least, negotiations as well as rearrangement of businesses and trade routes may take years.
As for the use of the ruble and the rupee as reserve currencies, the implementation of such project is even more difficult. The circulation of the ruble on world markets today is limited by Western sanctions, that is, the ruble has become a poorly convertible currency. In addition, the ruble is historically linked to world prices for hydrocarbons. And although the ruble officially is a partly floating currency, it still sensitive to fluctuations in oil and gas prices. If the fall in demand for hydrocarbons occurs (in case of a looming recession), the ruble risks losing its value considerably. Also, the ruble’s exchange rate is still managed by the Russian Central Bank. For example, in February 2022 the Russian Central Bank to prevent panic at domestic market decisively increased the key interest rate from 9,5% to 20%. So, ruble’s exchange rate can be quite unpredictable, especially in long-run.
The rupee is not under sanctions pressure but there is no demand for the Indian currency outside of India yet. However, Indian rupee is not yet fully convertible at the exchange markets, due to which international transactions take longer routes for processing. It also results in an uneasy access to capital, less liquidity in the financial market and less business opportunities. To overcome these challenges, India can transact with Iran, BRICS, SCO members and Russia in national or digital currencies.
Moreover, the rupee is a weak currency, it depreciates rather quickly, so rupee reserves are unattractive for international investors including Russia. Worth noting that pursuing de-dollarization policy Russia relied on the euro, the yuan, and gold. The same was relevant for bilateral trade settlements. Till February 2022 Russia has actively used the euro for trade deals with non-European economies as well. All in all, transition to national currencies for trans-border trade is rather politically driven decision than economic one. Anyway, from the economic point of view, it is better to develop bilateral trade between Russia and India putting currency issue on the second place.
(Yevgeny Ivanov is a lecturer and researcher at the HSE, Moscow, Russia and Ashish is a doctoral candidate at the NRU-HSE, Moscow, Russia.)
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