After the world financial crisis of 2008-2010, the process of de-dollarization began in the world economy. Increasingly more countries around the world, especially in Asia, are striving to decrease their use of American currency in their foreign trade. Doing so helps them to protect their financial systems from risks associated with fluctuations in the dollar’s rate and to strengthen their own currencies.
Turning away from the dollar in favor of national currencies provides significant benefits to countries that decide to embark upon this path if they have a sufficiently strong and stable economy. De-dollarization simplifies financial operations by reducing the number of transaction steps and helping to save time and money. De-dollarization also has political significance. First, using national currencies requires two countries to have a certain level of mutual trust and to continue to foster it in the future. Secondly, this helps states that disagree with the US to weaken America’s influence on their economies.
At the fore of the world de-dollarization process are America’s main economic competitors and political rivals, as well as countries that simply wish to remove their finances from foreign dependence. This includes China, Iran, and Russia. They are gradually bringing their political partners towards de-dollarization, offering them to switch from the dollar to national currencies for mutual settlements. It is remarkable that recently the number of countries decreasing their use of American currency was complemented by a USA strategical ally in South Asia: India. The country has, for example, already started to switch over to mutual settlements with Russia in their national currency.
It is surprising that the United States itself has, in recent years, commenced to push various countries to de-dollarization by threatening their opponents with sanctions for conducting economic operations, in which, until recently, dollars were the primary currency.
In August 2017, the United States passed the Countering America’s Adversaries Through Sanctions Act. The law also allows for secondary sanctions to be imposed against states and organizations working with countries that the US considers ‘enemies’. According to the law, the US may freeze their dollar accounts and transfers made outside American jurisdiction. American companies are also prohibited from working with countries and organizations listed in deals with US enemies. In September 2018, China found itself under secondary sanctions for purchasing Russian S-400 surface-to-air (SAM) missile systems. A host of high-ranking Chinese individuals and organizations involved in the defense purchase for China’s armed forces had their access to dollar operations blocked.
As a US partner in many areas, including security, India doesn’t want to lose that partnership. That is why the country is searching for workarounds to continue cooperating with Russia, Iran, and other countries without worrying that the US will block financial transfers. One of the ways to do that is by conducting payments via systems and organizations not connected to the US and that don’t use the American dollar.
Indian banks that actively work with the US, as mentioned above, and have multiple obligations to America, cannot be used for transactions between Russia and India. Indian companies that want to work with Russia are considering the option of paying for Russian imports through foreign branches of Russian banks using the ruble. Sberbank, Russia’s largest bank, operates in India and several Indian companies have decided to open accounts there.
At the beginning of October 2018, New Delhi was the site of the annual India-Russia summit, that brought together Russian President Vladimir Putin and Indian Prime Minister Narendra Modi. Suresh Prabhu, India’s Minister of Commerce and Industry, also spoke at the event. Among other topics, Mr. Prabhu stated that Russia and India are linked by age-old trade relations and that the two countries are entirely capable of considering switching to national currencies — rubles and rupees — in trade operations.
In mid-October 2018, reports emerged that India paid for Russian diamonds in rubles. India is among the world’s largest diamond manufacturers, while the Russian diamond mining company Alrosa is one of India’s largest suppliers of rough diamonds. In total, approximately 50% of Alrosa’s diamonds are sold to India. While India used to pay for Russian diamonds in dollars, the switch to rubles has turned out to be easier than expected. Alrosa’s management believes that paying in rubles through Russian banks can make Russian-Indian trade significantly easier and quicker. In the same vein, Alrosa has already succeeded in testing ruble-based payments with China.
A deal between Russia and India for the purchase of S-400 SAM was also agreed to in New Delhi in early October 2018 during the India-Russia summit. The agreement laid out the conditions for India’s purchase of five S-400 systems worth $5.4 billion. Like China, India agreed to the deal despite the risk of sanctions that the United States is supposed to impose on purchasers of Russian SAMs. The deal emphasized the importance of working with Russia for India’s leadership. However, this is not the only interesting news that came out of the summit. At the end of October 2018, information became available that India would be paying in rubles for this purchase, as well. In doing so, India once again avoided the risk of having transactions blocked by US authorities, which could have happened if dollars had been used for the payment.
Russia and China are also working intensely to switch to payments in national currencies. In early November 2018, the First China International Import Expo (CIIE) took place in Shanghai. Russian Prime Minister Dmitry Medvedev flew there to meet with China’s leader, Xi Jinping. Among the many topics that Mssrs. Medvedev and Xi discussed was the use of national currencies in Russo-Chinese economic relations. The Russian Prime Minister stated that he believes it is the right path to continue developing mutual lending for investment projects in yuan and rubles. He also said that payments in national currencies make it possible to strengthen the stability of international economic relations in conditions that see many reserve currencies becoming less reliable tools for trade.
Soon after, Igor Shuvalov, the head of Russia’s state bank for development and foreign trade (Vnesheconombank) announced that Russia and China may sign an agreement on payments in national currencies by the end of 2018. As he put it, the document has already been presented to Medvedev and Xi. Mr. Shuvalov also noted that China is as interested in such an agreement as Russia is.
Most experts believe that the switch to national currencies in Russia’s economic relations with China and India could change the world finance scene. The decision to eschew the US dollar by three powerful and wealthy countries could lead to a notable drop in the dollar’s exchange rate and, with time, to the end of its hegemony in the world economy.
Dmitry Bokarev, political observer, exclusively for the online magazine “New Eastern Outlook.”