Currency devaluation against the dollar has continued in January. Of the ten currencies that we compared, the INR weakened the most during a month, by 1.87%. The euro weakened by 0.33% against the dollar. While Chinese remnimbi gained marginally by 1.90% during the month. Other currencies that witnessed a devaluation in January include Bangladeshi taka, Vietnam Dong, Pakistani rupee, and Cambodian Riel. The currencies that gained in January include Turkish lira, Pakistani rupee, Sri Lankan rupee, and Myanmar kyat.
Currency fluctuations in the last one year, increasing protectionism especially by the US, the US-China trade war, US sanctions on Iran, and others, is forcing countries to de-dollarise their trade. We would not be too far wrong to say that Trump’s protectionist policies and sanctions have been far more effective in diversifying supply chains and trading practices, something that various regional groupings and trade partners have only been discussing for many decades.
Another reason for the increasing trend towards de-dollarisation is the formation of various regional trade groupings, the latest being the 11-member CPTPP, which came into force from December 31, 2019. Moreover, India’s Look East policy, growing intra-regional trade in South Asia, ASEAN, Africa, Central Asia, make it easier for economies to seriously consider common currencies, and trading in each other’s currency instead of in dollars.
Russia, China, India take the lead
India recently notified non-dollar-mediated rates of exchange for the Turkish lira and Korean won to facilitate trade and business with these two countries and ease the process of conversion of their respective currencies into INR and vice-versa.
“It is expected to decrease the transaction costs and enhance the ease of doing business, thereby, benefitting the Indian, Korean and Turkish businesses”, according to the Indian Ministry of Finance.
The decision by the Indian government to notify exchange rates for these currencies has been taken in the backdrop of growing bilateral trade and investments with Turkey and South Korea. Bilateral trade between India-South Korea grew to US$ 16.36 billion during 2017-18, from US$ 12.59 billion in 2016-17. South Korea is ranked 8th amongst India’s trade import partners during 2017-18.
“Also, as India has inked a Comprehensive Economic Partnership Agreement (CEPA) with South Korea, the trade flow between the two countries is expected to grow further”, the ministry added.
With regards to Indo-Turkish bilateral trade, the figures stood at US$ 7.2 billion for the year 2017-18. More than 150 companies with Indian capital have registered businesses in Turkey. These are in the form of Indo-Turkish joint-ventures, trade offices and/or representative offices.
Textile trade between India and Turkey is on the rise, and dedollarisation will give a further boost trade. Ranked the world’s sixth largest economy, India is one of the biggest merchandise importers. It’s not surprising that the country is directly affected by most global geopolitical conflicts and is significantly impacted by sanctions applied to its trading partners.
Earlier in 2018, Delhi switched to ruble payments on supplies of Russian S-400 air-defense systems as a result of US economic penalties introduced against Moscow. The country also had to switch to the rupee in purchases of Iranian crude after Washington reinstituted sanctions against Tehran. In December, India and the United Arab Emirates sealed a currency swap agreement to boost trade and investment without the involvement of a third currency.
Taking into account that India is the third largest country by purchasing power parity, steps of this kind could considerably diminish the role of the greenback in global trading. Meanwhile, the Indian government has approved a US$ 400 million currency swap arrangement for SAARC member countries, a US$ 75 billion currency swap with Japan. These arrangements ensure more currency stability, and will eventually help in economic cooperation and trade.
China is successfully internationalising the yuan
The ongoing trade conflict between the United States and China, as well as sanctions against Beijing’s biggest trading partners, have forced China to take steps towards relieving the dollar dependence of the world’s second largest economy. In Beijing’s signature soft-power style, the government hasn’t made any loud announcements on the issue. However, the People’s Bank of China has been regularly reducing the country’s share of US Treasuries. Still the number one foreign holder of the US sovereign debt, China has cut its share to the lowest level since May 2017.
China is trying to internationalise its own currency, the yuan, which was included in the IMF basket alongside the US dollar, the Japanese yen, the euro, and the British pound. Beijing has recently made several steps towards strengthening the yuan, including accumulating gold reserves, launching yuan-priced crude futures, and using the currency in trade with international partners. Chinese RMB as a currency currently represents about 15% of total global currency holdings.
As part of its ambitious Belt and Road Initiative, China is introducing swap facilities in participating countries to promote the use of the yuan. Moreover, the country is actively pushing for a free trade agreement – Regional Comprehensive Economic Partnership (RCEP), which will include the countries of Southeast Asia. RCEP includes 16 country signatories and the potential pact is expected to form a union of nearly 3.4 billion people based on a combined US$ 49.5 trillion economy, which accounts for nearly 40% of the world’s GDP.
In contrast, the CPTPP covers 13.2% of the global economy, 15% of global trade and a market of 500 million people. Chris Devonshire-Ellis of Dezan Shira & Associates comments: “Global economists and analysts appear to be too fixated on the immediate short term while it is what is occurring on the horizon that is rather more meaningful. While I expect China and the US to reach a medium to short-term truce as regards their current trade disagreements, there are strong signs that China will not take kindly to future trade antagonism and especially if this starts to involve sanctions. To this end, there is marked collusion between China and Russia in dealing with the US in case of future problems. Dedollarization, the building up of alternative assets and the entire Belt and Road Initiative are all linked to seeing the Chinese economy eventually begin to untangle itself from the US. It is doing this slowly, carefully, and with the full support and understanding of Moscow. This places the primary market of the EU in a position of choice between becoming part of Eurasia or aligning itself with the US. However, the mechanism towards Europe eventually having to make this choice is already in motion.”
Turkey reduces dependence on the greenback
Earlier this year, Turkish President Recep Tayyip Erdogan announced plans to end the US dollar monopoly via a new policy that is aimed at non-dollar trading with the country’s international partners. Later, Turkey’s leader announced that Ankara is preparing to conduct trade through national currencies with China, Russia and Ukraine. Turkey also discussed a possible replacement of the US dollar with national currencies in trade transactions with Iran. Erdogan has repeatedly slammed Washington for unleashing a global trade war, sanctioning Turkey and trying to isolate Iran. The NATO member’s decision to buy Russian S-400 missile systems added fuel to the fire.
Moreover, Turkey is trying to ditch the dollar in an attempt to support its national currency. The lira has lost nearly half of its value against the greenback over the past year. The currency plunge was exacerbated by soaring inflation and increasing prices for goods and services.
Iran forced to find alternatives
Sanctions have forced Tehran to look for alternatives to the US dollar as payment for its oil exports. Iran clinched a deal for oil settlements with India using the Indian rupee. It also negotiated a barter deal with neighbouring Iraq. The partners are also planning to use the Iraqi dinar for mutual transactions to reduce reliance on the US dollar amid banking problems connected to US sanctions.
Russia ruble will rule in the region
Russia seeks to de-dollarise its economy by 2024. Russia has about US$ 500 billion in foreign reserves, and can keep the ruble stable despite US sanctions pressure. The current period of high oil prices could also help Russia’s economy. Economists advise that Russia should diversify not only into rubles, but also use the Chinese yuan, Vietnamese dong, Indian rupee, and even the euro, analysts say. Russia, meanwhile, holds around 10 times more Chinese RMB than other central banks do, and has accumulated about 25% of the total world reserves in Chinese RMB. Earlier this year, Russia has dumped its holdings of US Treasuries in favour of more secure assets, such as the ruble, the euro, and precious metals.
The country has already taken several steps towards de-dollarising the economy due to the constantly growing burden of sanctions that have been introduced since 2014 over a number of issues. Russia has developed a national payment system as an alternative to SWIFT, Visa and Mastercard after the US threatened tougher new sanctions that would target Russia’s financial system. So far, Moscow has managed to partially phase out the greenback from its exports, signing currency swap agreements with a number of countries including China, India and Iran. Russia has recently proposed using the euro instead of the US dollar in trade with the European Union.
On the trade aspect, this makes sense, Russian trade with the US is close to zero, while with China it has been expanding fast – there are suggestions of it hitting US$ 200 billion in five years – a 20% increase year-on-year, every year from now. Russia has been persuing a dedollarization policy for some time now. The plan specifically stipulates a gradual shift to bilateral trade with countries in their own currencies, especially within the framework of the Eurasian Economic Union (EAEU). This has already been taking place with 70% of EAEU trade now being conducted in non-US dollar currencies. Russia-EU trade was also up 20% in 2018, despite sanctions. Russia is working on shifting to settlements in local currencies with the countries of the Middle East, Southeast Asia, Latin America and Africa.
Chris Devonshire-Ellis comments: “The Russian position on the US dollar is a response both to Washington’s effective control and monitoring of the global financial transactions system and a more recent trend of weaponising the currency. While Russian trade with the United States is negligible and dedollarising the economy unlikely to hurt the United States, the US dollar could start to lose global traction if Russian actions are taken up by other countries. Also, as new Eurasian trade corridors begin to emerge the US dollar could find itself cut out of transactions in future years. How this plays out remains to be seen however an acceleration of dedollarising the global trade community cannot be ruled out, especially if China begins to enact a similar stance.”
Russia, India trade on the rise
As Russian businesses continue to react to sanctions imposed by the West, its newfound trade corridors elsewhere, and especially in Asia, continue to develop. Trade between Russia and India has been steadily growing and exceeded US$ 10 billion in 2018. The two nations are aiming to further boost trade and encourage investment. Russia and India have set a reasonable target of bringing the trade turnover between the two countries to US$ 30 billion, and mutual investments to US$ 15 billion by 2025.
The two countries are also considering a ‘green corridor’ for the smooth transit of goods. They want to create a list of entrepreneurs or companies whose goods will be exempt from regular customs inspections. “Western sanctions are having the effect of motivating Russian businesses to look to Asia for new opportunities and replace those lost in Europe” comments Chris. “There is plenty of room for development in the Russia-India trade space and improved interconnectivity is now making such trade routes operationally and economically viable. Russia-India bilateral trade is a growing trend.”
EAEU de-dollarises 70% of its 2018 trade
Member states of the Eurasian Economic Union (EAEU) – Armenia, Belarus, Kazakhstan, Krygyzstan and Russia have increased the share settlements in local currencies to 70% in 2018. The EAEU aims to increase this further by ensuring macroeconomic and financial stability, creating a common financial market, and harmonisation of legislative control over the financial sector.
The EAEU in geographical terms extends from the Western borders of China to the eastern borders of the European Union and is the “Road” portion of China’s Belt & Road Initiative. The EAEU has a population of some 183 million and a GDP of some US$5 Trillion. Intra-EAEU trade has been significantly increasing and rose 38% last year.
Apart from the five member nations, the EAEU also includes Moldova as an observer state, while Tajikistan, Uzbekistan, Mongolia, Turkmenistan, Iran, Turkey, Syria and Tunisia are also all reportedly planning to join the union. The EAEU is also in the process of agreeing numerous Free Trade Agreements, a full FTA was signed off with Vietnam two years ago, a non-preferential FTA with China this year, in addition to a deal with Iran. Other Asian nations, including Singapore, India, Indonesia and Turkey are all currently negotiating FTA with the Union. Thailand upgraded its trade ties with the EAEU just last week.
BRICS looks to de-dollarise too
The EAEU is not the only alliance of countries willing to replace the US dollar with alternative currencies in trade. The BRICS group (Brazil, Russia, India, China and South Africa) of emerging economies took steps towards increasing settlements in local currencies to avoid using the US dollar. Countries like China, Russia, Iran, Iraq, Venezuela and others are also planning to substitute the US national currency in oil trade.
“The move to de-dollarise is gaining momentum as trade between Russia, China, Eurasian and Asian nations continues to grow.” Said Chris. “The trend is clear – the Chinese RMB Yuan and Russian Ruble will in time re-assert their position as globally alternative currencies, while the United States will lose traction, control and monitoring of currency movements throughout the Eurasian region. China and Russia are already developing alternative payments systems to services such as SWIFT. The currencies in use across the Belt & Road will in time be predominantly Chinese and Russian.”
EAEU business expands with Vietnam, ASEAN
Vietnam signed off on a full Free Trade Agreement with the EAEU in 2016, and has seen significant trade benefits as a result. In 2017, bilateral trade between Vietnam and the EAEU grew by 31%, compared to 2016, to reach US$ 3.9 billion. In addition, Vietnam also had a trade surplus of almost US$ 1 billion with the EAEU. In the first four months of this year, EAEU-VN trade reached US$ 1.53 billion, growing by 35%. Russia continues to remain the major trading partner in the bloc, accounting for almost 90% of the trade with Vietnam.
The free trade agreement covers more than 90% of all traded goods, and has greatly benefited the EAEU’s exports of agricultural and industrial products, and Vietnamese exports of garments, textile products, farm products, and electrical devices.
By the end of 2018, a further 5,535 tariff lines were reduced to zero percent. Reductions focussed on items that are input materials for the textiles, footwear among others. However, the FTA also provides some protective measures.
Currently, certain products in the textile and garment sector in Vietnam face safeguard duties from the EAEU, which aims to limit the increasing volume of imports to the Union. Since March 14, 2018, duties were imposed on Vietnamese underwear and children’s wear products for nine and six months, respectively.
In the last few years, the EAEU has also started to work with other ASEAN member states on trade and investment, and this puts Vietnam in a unique position, as it can act as a supply chain gateway for Russian and other EAEU businesses in the region. Going forward, to achieve their target of US$ 10-12 billion bilateral trade by 2020 and US$ 30 billion by 2030, trade between Vietnam and the EAEU can be expected to grow exponentially. De-dollarisation is just the beginning of the process of realignment of the global order.