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Barriers to de-Dollarization Within BRICS

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This article explores systemic and market barriers preventing the wider use of BRICS national currencies in trade, including currency swaps mechanisms and reasons for BRICS exporters’ preference not to use national currencies. Design flaws are outlined in the New Development Banks’ Contingency Reserve Arrangement (CRA) in the context of de-dollarizing BRICS trade, namely its IMF linkage requirements and limited scope, symptomatic of a lack of trust between BRICS member states. The current levels of de-dollarization in Russia’s intra-BRICS settlements (as a representative sample) are used to find gaps between Russia’s stated de-dollarization goals and current initiatives, and market barriers are identified to explain this gap. Finally, the components of market mechanisms needed to de-risk Intra-BRICS trade and overcome the identified barriers are outlined.

Background to Challenge

The 2017 BRICS New Development Bank’s strategy report The Role Of BRICS In The World Economy & International Development detailed a long-term vision of the direction BRICS countries’ economic cooperation was headed in. The strategy report made the case that reforms in the existing western institutions would not be in BRICS countries’ favour in the near future, and hence emphasized the importance of a new Multilateral Clearing Union (MCU) which would serve as an intra-BRICS currency swap pool and tackle balance of payment shortcomings, trade finance, financial crisis aversion, and an overall restoration of sovereignty by de-dollarizing BRICS trade (NDB, 2017). This intention was also echoed in the 2017 BRICS Xiamen Summit declaration, which stated:

We agree to …enhance currency cooperation, consistent with each central bank’s legal mandate, including through currency swap, local currency settlement, and local currency direct investment….We commend the progress in concluding the Memoranda of Understanding among national development banks of BRICS countries on interbank local currency credit line and on interbank cooperation in relation to credit rating.

In parallel to the Xiamen summit, the R5+ (Real, Ruble, Rupee, Renminbi, Rand, in addition to the currencies of BRICS+ countries) currency initiative was launched, which sought to stimulate the use of national currencies for “investments, long-term projects, creation of common payment card systems and common settlement/payment systems, cooperation in promoting BRICS+ currencies towards reserve currency status.”

The New Development Bank’s proposed Multilateral Clearing Union was manifested in the form of a $100 billion Contingency Reserve Arrangement (CRA) that BRICS countries devised as a pool to swap currencies in times of need, increasing national currency settlement. The CRA included two currency swap instruments to support short-term balance of payment (BoP) pressures between a country’s current and capital accounts: 1) a liquidity instrument to provide support in response to current BoP gaps, and 2) a precautionary instrument to buffer against future BoP gaps. A country’s access to the shared capital funds was limited by conditionality, as only 30% of accessible funds (“de-linked portion”) were available on demand, whereas the majority, 70% of accessible funds require on-track arrangements with the IMF, as the CRA’s rationale document explains:

Where financing in excess of this 30% limit is required, an ‘IMF-linked portion’ will be made available. This will allow the country access to the remaining 70%, provided that a conditionality-based agreement with the IMF is concluded” (Biziwick, M., Cattaneo, N. and Fryer, D., 2015 (p. 316)).

CRA Defects

Of importance, it is worth noting that rather than having a mechanism for direct currency swaps, a swap transaction was defined as “the Requesting Party’s central bank purchases US dollars (USD) from the Providing Party’s central bank in exchange for the Requesting Party Currency, and repurchases on a later date the Requesting Party Currency in exchange for USD” (Biziwick et al., 2015 (p. 316)).

As a result, the CRA’s IMF linked component and USD reserve currency status raise questions about whether there is a potential mismatch between the stated goals of the MCU and the CRA’s implementation mechanism. In the RISS Joint Research Paper Use of national currencies in international settlements: Experience of the BRICS countries, Karataev et al state:

Though the BRICS countries have established a Contingent Reserve Arrangement… the currency swap under this arrangement is one between US dollar and local currencies of BRICS, not one among the BRICS currencies. Currently, there are few local currency swap agreements in force (between Russia and China, China and South Africa)” (Karataev et al., 2017 (p.110).

The key barriers hindering the CRA’s success towards its stated goals, including the CRA’s promissory model, limited size (mirroring the limited paid-in capital allocated to BRICS’ New Development Bank), and IMF linking, stem from the CRA modelling itself after the ASEAN+3 Chiang Mai currency swap initiative, which had a limited scope, operated on a promissory model rather than an actual capital pool, and carried a significant IMF-linked portion due to the lack of financial surveillance capacity and moral hazard borrowing risk (Biziwick et al., 2015 (p. 318)). On a macro level, “the CMI/CMIM arrangement has been criticized as utterly ineffective (it did not play any role in the 2008 crisis, for example), and the concern is that, by adopting its form, the CRA is condemning itself to a similar fate. Size and IMF linking (along with the lack of a rapid response facility) seem to have been major problems with the CMI/CMIM arrangement…the IMF linking seems hard to reconcile with the intention to provide a counterweight to the IMF ” (Biziwick et al., 2015 (p. 318)). Thus, as was the case with the Chiang Mai currency swap initiative, the BRICS NDB’s CRA’s promissory model, limited size (mirroring the limited paid-in capital allocated to BRICS’ New Development Bank), and IMF linking all stem from a fundamental lack of trust between BRICS member countries on their self-reliance for monitoring and governance of each others’ and common funds.

Despite their stated desire to break away from IMF’s conditionalities and dollar-denominated trade, at least in the CRA, a greater trust has been placed in the IMF for monitoring conditions for credit swaps. BRICS countries have thus inadvertently followed precedents set by hegemons.

This status quo is not inevitable, and can easily be overcome by coordinated CRA reform to introduce an internal trust-ensuring credit mechanism amidst financial instruments in national currencies to build the foundation for true independence from IMF and dollar-denominated transactions.

Market barriers to BRICS Trade De-Dollarization:

In addition to the CRA design flaws, BRICS Trade De-Dollarization is also held back by market barriers. As a representative sample to measure progress in de-dollarization, the currency composition of Russia’s publicly available intra-BRICS trade settlement since the launching of prominent de-dollarization initiatives in 2017 can be examined, as shown in figure 1 below. The percentage of Russian exports to BRICS countries settled in dollars has fallen from its peak of above 80% in Q1 2018 to 33.2% as of first quarter of 2020 (CBR, 2020). While Russian exports to BRICS have de-dollarized recently, it is apparent that rather than BRICS currencies, the Euro has replaced the dollar as the dominant export settlement currency (Russia is receiving only 13% of its exports in Rubles as of Q1 2020).

Figure 1: Settlement Currency Percentage for Russian Exports to BRICS (CBR, 2020)

This is due to Russian energy exporters preferring to denominate contracts in Euros rather than Rubles recently, for the same reason they previously preferred to denominate contracts in Dollars: greater volume of Rubles received in case of depreciation. By contrast, Russian imports from BRICS countries are still largely settled in Dollars as of Q1 2020, though there is a gradual de-dollarization trend present. The “other” currency slowly rising in imports settlements most likely being largely comprised of the Renminbi Yuan, as China and Russia have been accelerating ruble and yuan use in trade since 2019. Despite this, as demonstrated in Figure 1, it is worthy to note that Russia’s inter-BRICS trade is by far settled mostly in Dollars and Euros rather than Rubles or any other BRICS currency, indicating a gap of between Russian traders’ settlement currency choice and BRICS de-dollarization priorities.

To explain this phenomenon in greater detail, Karataev et al. outlined two key fundamental market barriers preventing the use of national currencies for BRICS trade finance specifically which need to be overcome as a supplement intra-BRICS currency swaps:

1. Currency Volatility:

Exchange rate fluctuations create uncertainty in optimizing settlement pricing and profitability at time of contract fulfilment from both exporters’ and importers’ perspective- “Exporters will seek to denominate their contracts in foreign exchange when their national currency is devaluing. It will allow them to receive additional profits in the national currency…(whereas) importers shall be encouraged to invoice a contract price in their national currency in order to reduce costs and prevent a decline in demand as a result of rising prices.” (Karataev et al., 2017 (p.20)).

2. Global Commodity Benchmarks:

 “Exporters of similar goods [i.e. commodities]… will seek to establish the contract price in the same currency as their competitors. That allows them to neutralize more successfully the adverse exchange rate fluctuations resulting in considerable price changes and therefore prevent the risk of reducing demand. As a result, the market price of such goods is denominated mostly in the US dollar….the global commodities exchange trade in these goods plays a significant role…if the global commodities market’s impact on the pricing model will decrease, the use of the USD as invoicing currency will decline too.” (Karataev et al., 2017 (p.19)).

Thus, the dominant factors preventing BRICS currency usage in trade were exchange rate fluctuations causing exporters to optimize profit margins by using foreign exchange (typically denominated in dollars), and industry benchmarks for export goods pricing, especially the influence of global commodities exchanges denominated in dollars. Amongst BRICS countries, this holds true for the largest Russian energy exporters, who often prefer to be paid in dollars or euros in order to maintain standardized price points and obtain additional rubles in case of depreciation.

However, empirical research demonstrated by Nakajima et al. with the vine copula method and value-at-risk model has found that using BRICS currencies in energy trade resulted in more stable prices and avoided translation risks compared to using dollars due to counter-balancing movements with oil prices (Nakajima et al, 2020). Thus, though dollar-denominated oil contracts may provide short-term gains for exporters, the overall commodity trade between BRICS countries would benefit from the use of national currencies. In addition, though the Euro is replacing the Dollar as Russia’s preferred export settlement currency within BRICS, the Euro poses lesser but similar risks to being weaponized by sanctions, given that it is still a third party non-BRICS currency and European Union sanctions against Russia could be expanded in the near future in light of political events unfolding in 2020 (i.e. EU-Russia differences over Belarus protests, Navalny incident, etc.).

Current Steps:

To overcome the remaining barriers to using national currencies, current steps being taken in BRICS include developing an in-house settlement system for trade finance based on Russia’s SPFS alternative to SWIFT, linking domestic payment systems to create the New International Payment System (NIPS), and researching feasibility requirements towards a common BRICS cryptocurrency. In addition, while progress has been made in diversifying the NDB’s loan denominations to include more local currencies, with a goal of 50% project financing in the near future according to NDB’s president, the more widespread internationalization of BRICS currencies would require mature bond markets to be created in all BRICS countries to compete with western bond markets. This was initiated by the creation of BRICS Local Currency Bond Fund during the 2017 BRICS Xiamen Summit declaration:

We agree to promote the development of BRICS Local Currency Bond Markets and jointly establish a BRICS Local Currency Bond Fund, as a means of contributing to the capital sustainability of financing in BRICS countries, boosting the development of BRICS domestic and regional bond markets, including by increasing foreign private sector participation, and enhancing financial resilience of BRICS countries.

Though these steps are cumulatively designed to increase autonomy over intra-BRICS fund flows, they do not, however, address the fundamental gap in de-risking the barriers to using national currencies in BRICS settlements which are holding back their more widespread use. Central Bank of Russia Governor Dr Elvira Nabiullina echoed this sentiment in 2019 when she claimed that while gold-pegged cryptocurrencies are being researched, it was more important to develop international settlements using national currencies. Thus, while BRICS payment and settlement systems are being integrated, BRICS local bonds are being developed, direct currency swap lines are being expanded, and an intra-BRICS cryptocurrency architecture conceptualized and brought to market, a crucial intermediate supplementary step in de-dollarizing inter-BRICS trade finance is establishing de-risked and mutually trustable intra-BRICS trade contracts to expand national currency settlement, overcoming the market barriers mentioned previously.

Gap Identification: Steps Needed for De-Risking Trade

Karataev et al. proposed a multi-tiered circular system whereby national and intra-BRICS financial institutions complement and coordinate with BRICS trade settlement transactions to create a robust system for using local currencies. The components steps were outlined as follows: 1) direct currency trading expansion and lowering transactions costs 2) creation and use of hedging instruments in BRICS currency pairs which would reduce risk management costs 3) widening of Swap Agreements and limiting liquidity risk, 4) local currency bond market development in conjunction with trade and development goals 5) trade surplus re-investment into local bond markets 6) diversification of bond markets and BRICS policy coordination for using these instruments to achieve currency internationalization goals (Karataev et al., 2017 (p. 111)).

Out of these measures, the CRA was designed to meet the needs of step 3, whereas progress has been started on steps 4-6 by the New Development Bank based on initiatives launched during the Xiamen summit. However, concrete initiatives are needed to fulfil steps 1 and 2. Karataev et al. specified three key exchange mechanisms in particular which need to be established to lower transaction costs and de-risk the use of national currencies in intra-BRICS trade contracts to overcome the aforementioned barriers for steps the first two steps mentioned above:

  1. BRICS Interbank foreign exchange market, whereby “companies should be able to purchase/sell a currency quickly and without additional costs to make settlements in such currency. This presumes the existence of a highly developed and liquid interbank and forex markets with large numbers of participants and convertible financial instruments” (Karataev et al., 2017 (p.18)).
  2. Currency Hedging instruments — “It will be necessary to encourage trading directly in BRICS currencies that will significantly contribute to lowering costs. This step [BRICS Trading pairs] has to be augmented with the creation and use of hedging instruments in BRICS currency pairs which might allow to reduce risk management costs. During the first stage leading public banks of BRICS countries may function as market makers on currency pairs to provide necessary liquidity.” (Karataev et al., 2017 (p.110)).
  3. BRICS Commodify Exchange — “Launching of a Commodity Exchange or some type of an e-trading platform for trade in goods and derivatives of various kinds can be one more instrument contributing to enhancing LCY [local currency] use in settlements in the BRICS countries…raw material trade could be mediated by setting market prices denominated in local currencies. With appreciable quantity of foreign investors trading on the exchange, this will lead to the internationalization of contracts denominated in local currencies” (Karataev et al., 2017 (p.112)).

In addition to the above three suggested exchanges, intra-BRICS trade de-dollarization requires the IMF-linked portion of the CRA to be removed to enable direct currency swaps to take place, granted the existence of bilateral swap agreements between all BRICS countries. A necessary replacement for the IMF on-track arrangement must be established between BRICS countries: a counter-party de-risking mechanism which serves as an independent source of trust to validate the fulfilment criterion of trade-necessitated direct currency swaps, thus eliminating the need for IMF on-track arrangements and consequent USD conversion.

Currently, all BRICS countries are largely reliant on western facilities for the above four types of exchanges. SWIFT largely dominates international interbank transfer settlement, with the Russian and Chinese SWIFT alternatives operating mostly domestically, though there are plans for integration of BRICS settlement systems as mentioned previously. BRICS countries have yet to develop a comprehensive intra-BRICS hedging mechanism for mitigating currency volatility risk directly independent of dollar and euro-denominated western capital markets.

Conclusions and Recommendations:

BRICS countries have maintained a longstanding goal of de-IMFing and de-dollarizing their trade settlements and reserves in order to increase their sovereignty over transactions and avoid currency crisis, and proposed the creation of a Multilateral Clearing Union towards that goal. However, design flaws in the Multilateral Clearing Union, a lack of an independent credit monitoring mechanism, and lack of currently de-risking mechanisms in intra-BRICS trade finance prevented the wider use of national currencies.

To overcome the reluctance of BRICS traders to take trade finance loans and settle in BRICS national currencies, there is a need to introduce forward hedging options with minimal cost of carry so traders can avail direct hedging options simultaneously with trade contracts to de-risk their trade contract in national currencies. As Karatev et al. concluded, in the long term goal, boosting demand for direct BRICS currency settlement would itself partially smooth out some of the volatility experienced by cyclical western capital flight, thus lowering the risk premium and cost of carry for forward contracts, making BRICS currencies the natural preferred choice in trade finance (Karataev et al., 2017 (p.110).

After a currency options market, a BRICS commodity exchange specifically needs to be created in which commodity prices are denoted in national currencies, and are accompanied by derivatives and other risk hedging options that minimize the combined effects of currency and commodity price fluctuations, essentially serving as a favoured market for BRICS commodity importers and exports to set contracts in national currencies and have instruments to de-risk any expected volatility. The most significant example of a local currency commodity exchange within BRICS was the Petro-Yuan futures market launched in China in 2016, which served as a viable alternative to the dominant dollar-denominated WTI and Brent oil exchanges. Though Russia has set up a similar exchange in the form of the Ural Oil Futures market, work remains to be done to achieve maturity and usage to the level of established commodities exchanges.

Combined with direct currency swap lines and an intra-BRICS free trade zone, the implementation of the above mechanisms would lower the transaction cost of BRICS national currency trade settlement, by lowering the risk premium for importers and exporters to set contracts in national currencies amidst exchange rate uncertainty. Thus, these exchanges would fulfil the BRICS goals of “focus[ing] joint efforts on providing companies engaged in foreign trade from BRICS countries with the same, or lower transaction (compliance) costs, guarantees of settlement and risk management that they currently have in utilizing the dollar, euro or yen” (Karataev et al., 2017 (p.110-111)).

In 2018, export-oriented development banks from all BRICS countries signed a MoU to enhance understanding of distributed ledger or blockchain technology for solving challenges in trade finance, with the aim of identifying areas to improve operational efficiencies and tackle common financial challenges. In 2019, the BRICS Business Council formed a working group exploring how a special trade-facilitating BRICS crypto-currency could be created to ensure the smooth flow of paperless document flow for trade obligations.

In fact, creating a specialized crypto-currency for document flow is not necessary to meet the BRICS goal of de-risking national currency trade settlement. The simplest yet most advanced and low-cost blockchain feature to enable the above four exchanges to take place directly between BRICS traders and banks (and allow a seamless disintermediation of transactions between separate parties without the need for outside third parties such as IMF) are Smart Contracts, an original feature of Ethereum networks but later adapted by other blockchain networks. Smart Contracts allow for multiple parties to program and pre-set conditional criterion for contracts based on fulfilment of services or market conditions, and automate the verification of fulfilment criterion via decentralized external verification engines known as Oracles, which are blockchain middleware that create a secure connection between Smart Contracts and various off-chain resources required for fulfilment. Funds needed to execute the contract can be temporarily pre-stored in a linked virtual escrow-like account associated with the contract to guarantee fund availability at the time of execution. Once the contract execution date arrives and conditional fulfilment checks have been completed, Smart Contracts self-execute and disburse associated payments to the contracting parties, automating execution and settlement and eliminating contract disputes and counter-party non-fulfilment risks.

Due to their automated fulfilment capabilities and dis-intermediation of third party legal and settlement entities, Smart Contracts are starting to be gain traction in western consortiums for trade finance, currency trading, and commodity trading in the mainstream dollarized economy. Trade Finance systems based on Smart Contract are currently enabling on average a 35% reduction in costs and the elimination of the 1–2 weeks of processing time for settlements, in addition to removing room for manual errors.

The author has proposed a solution implementing the above exchanges using Smart Contracts to De-Risk and De-Dollarize Intra-BRICS Trade—further details on this solution beyond those mentioned in this article can be seen in the December 2020 issue of the BRICS Journal of Economics.

Printed Sources Cited:

  • Biziwick, M., Cattaneo, N. and Fryer, D. (2015) “The rationale for and potential role of the BRICS Contingent Reserve Arrangement.” South African Journal of International Affairs. 22:3, 307-324.
  • Central Bank of Russia Trade Finance Settlement Data. “Credit Statistics” http://www.cbr.ru/vfs/statistics/credit_statistics/cur_str.xlsx translated into English, plotted in Excel.
  • Nakajima, Tadahiro, Yijin, He and Hamori, Shigeyuki. (2020). Can BRICS’ currency be a hedge or a safe haven for energy portfolio? An evidence from vine copula approach. The Singapore Economic Review. 65(4) 805-836. https://doi.org/10.1142/S0217590820500174.
  • NDB – New Development Bank. (2017) “The Role Of BRICS In The World Economy & International Development” BRICS New Development Bank Strategy Report. https://reddytoread.files.wordpress.com/2017/09/brics-2017.pdf.

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Economy

A New Strategy for Ukraine

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Authors: Anna Bjerde and Novoye Vremia

Four years ago, the World Bank prepared a multi-year strategy to support Ukraine’s development goals. This was a period of recovery from the economic crisis of 2014-2015, when GDP declined by a cumulative 16 percentage points, the banking sector collapsed, and poverty and other measures of insecurity spiked. Indeed, we noted at the time that Ukraine was at a turning point.

Four years later, despite daunting internal and external challenges, including an ongoing pandemic, Ukraine is a stronger country. It has proved more resilient to unpredictable challenges and is better positioned to achieve its long-term development vision. This increased capacity is first and foremost the result of the determination of the Ukrainian people.

The World Bank is proud to have joined the international community in supporting Ukraine during this period. I am here in Kyiv this week to launch a new program of assistance. In doing this, we look back to what worked and how to apply those lessons going forward. In Ukraine—as in many countries—the chief lesson is that development assistance is most effective when it supports policies and projects which the government and citizens really want.

This doesn’t mean only easy or even non-controversial measures; rather, it means we engage closely with government authorities, business, local leaders, and civil society to understand where policy reforms may be most effective in removing obstacles to growth and human development and where specific projects can be most successful in delivering social services, particularly to the poorest.

Looking back over the past four years in Ukraine, a few examples stand out. First, agricultural land reform. For the past two decades, Ukraine was one of the few countries in the world where farmers were not free to sell their land.

The prohibition on allowing farmers to leverage their most valuable asset contributed to underinvestment in one of Ukraine’s most important sources of growth, hurt individual landowners, led to high levels of rural unemployment and poverty, and undermined the country’s long-term competitiveness.

The determination by the President and the actions by the government to open the market on July 1 required courage. This was not an easy decision. Powerful and well-connected interests benefited from the status quo; but it was the right one for Ukrainian citizens.

A second area where we have been closely involved is governance, both with respect to public institutions and the rule of law, as well as the corporate governance of state-owned banks and enterprises. Poll after poll in Ukraine going back more than a decade revealed that strengthening public institutions and creating a level playing field for business was a top priority.

World Bank technical assistance and policy financing have supported measures to restore liability for illicit enrichment of public officials, to strengthen existing anticorruption agencies such as NABU and NACP, and to create new institutions, including the independent High-Anticorruption Court.

We are also working with government to ensure the integrity of state-owned enterprises. Our support to the government’s unbundling of Naftogaz is a good example; assistance in establishing supervisory boards in state-owned banks is another. We hope our early dialogue on modernizing the operations of Ukrzaliznytsia will be equally beneficial.

As we begin preparation of a new strategy, the issues which have guided our ongoing work—strengthening markets, stabilizing Ukraine’s fiscal and financial accounts; and providing inclusive social services more efficiently—remain as pressing today as they were in 2017. Indeed, the progress which has been achieved needs to continue to be supported as they frequently come under assault from powerful interests.

At the same time, recent years have highlighted emerging challenges where we hope to deepen and expand our engagement. First, COVID-19 has underscored the importance of our long partnership in health reform and strengthening social protection programs.

The changes to the provision of health care in Ukraine over recent years has helped mitigate the effects of COVID-19 and will continue to make Ukrainians healthier. Government efforts to better target social spending to the poor has also made a difference. We look forward to continuing our support in both areas, including over the near term through further support to purchase COVID-19 vaccines.

Looking ahead, the challenge confronting us all is climate change. Here again, our dialogue with the government has positioned us to help, including to achieve Ukraine’s ambitious commitment to reduce carbon emissions. During President Zelenskyy’s visit to Washington in early September we discussed operations to strengthen the electricity sector; a program to transition from coal power to renewables; municipal energy efficiency investments; and how to tap into Ukraine’s unique capacity to produce and store hydrogen energy. This is a bold agenda, but one that can be realized.

I have been gratified by my visit to Kyiv to see first-hand what has been achieved in recent years. I look forward to our partnership with Ukraine to help realize this courageous vision of the future.

Originally published in Ukrainian language in Novoye Vremia, via World Bank

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Russia, China and EU are pushing towards de-dollarization: Will India follow?

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Authors: Divyanshu Jindal and Mahek Bhanu Marwaha*

The USD (United States Dollar) has been the world’s dominant currency since the conclusion of the second world war. Dollar has also been the most sought reserve currency for decades, which means it is held by central banks across the globe in significant quantities. Dollar is also primarily used in cross-border transactions by nations and businesses. Without a doubt, US dollar’s dominance is a major reason for the US’ influence over public and private entities operating around the world. This unique position not only makes US the leader in the financial and monetary system, but also provides incomparable leverage when it comes to coercive ability to shape decisions taken by governments, businesses, and institutions.

However, this dynamic is undergoing gradual and visible changes with the emergence of China, slowdown in the US economy, European Union’s independent policy assertion, Russia-US detachment, and increasing voices from across the world to create a polycentric world and financial system in which hegemonic capacities can be muted. The world is witnessing de-dollarisation attempts and ambitions, as well as the rise of digital or cryptocurrencies at an increasing pace today.

With Russia, China and EU leading the way in the process of de-dollarisation, it needs to be argued whether India, currently among the most dollarized countries (in invoicing), will take cue from the global trends and push towards de-dollarisation as well.

Why de-dollarisation?

The dominant role of dollar in the global economy provides US disproportionate amount of influence over other economies. As international trade needs a payment and financial system to take place, any nation in position to dictate the terms and policies over these systems can create disturbances in trade between other players in the system. This is how imposition of sanctions work in theory.  

The US has for long used imposition of sanctions as a tool to achieve foreign policy and goals, which entails restricting access to US-led services in payment and financial transaction processing domains.

In recent years, several nations have started opposing the unilateral decisions taken by the US, a trend which accelerated under the former president Donald Trump’s tenure. He withdrew US from the JCPOA deal between Iran and US, aimed at Iran’s compliance with nuclear discipline and non-proliferation. Albeit US withdrawal, other signatories like EU, Russia, and China expressed discontent towards the unilateral stance by the US and stayed committed towards the deal and have desired for continued engagements with Iran in trade and aid.

Similarly, the sanctions imposed on Russia in the aftermath of the Crimean conflict in 2014 did not find the reverberations among allies to the extent that US had wanted. While EU members had switched to INSTEX (Instrument in Support of Trade Exchanges) which acts as a special-purpose vehicle to facilitate non-USD trade with Iran to avoid US sanctions, EU nations like Germany continue to have deep trade ties with Russia, and  EU remains the largest investor as well the biggest trade partner for Russia, with trade taking place in euros, instead of dollars.

Further, despite the close US-EU relations, EU has started its own de-dollarization push. This became more explicit when earlier this year, EU announced plans to prioritize the euro as an international and reserved currency, in direct competition with dollar.

Trajectories of Russia, China, and EU’s de-dollarisation push

Russia has emerged as the nation with the most vigorous policies oriented towards de-dollarization. In 2019, the then Russian Prime Minister Dmitry Medvedev had invited Russia’s partners to cooperate towards a mechanism for switching to use of national currencies when it comes to transactions between the countries of the Shanghai Cooperation Organization (SCO). It must be noted that in Eurasian Economic Union (EAEU), which functions as a Russian-led trade bloc, more than 70 percent of the settlements are happening in national currencies. Further, in recent years, Russia has also switched to settlements in national currencies with India (for arms contracts) and the two traditionally strong defence partners are aiming at exploring technology as means for payment in national currencies.

Russia’s push to detach itself from the US currency can also be seen in the transforming nature of Russia’s foreign exchange reserves where Russia for the first time had more gold reserves than dollars according to the 2018 data (22 percent dollars, 23 percent gold, 33 percent Euros, 12 percent Yuan). As per the statement by Russian Finance Minister in 2021, Russia aims to hold 40 percent euro, 30 percent yuan, 20 percent gold and 5 percent each of Japanese yen and British pound. In comparison, China holds a significant amount of dollar denominated assets as forex reserves (50 to 60 percent) and has the US as its top export market with which trade takes place mostly in US dollars. Moreover, Russia has also led the push by creating its own financial messaging system- SPFS (The System for Transfer of Financial Messages) and a new national electronic payment system – Mir, which has witnessed an exponential rise in its use.

While China-Russia trade significantly depends on euros instead of  their own national currencies (even though use of national currencies is slowly rising), instead of pushing the Chinese national currency Renminbi (RMB), Beijing is aiming towards establishing itself as the first nation to issue a sovereign digital currency, which would help China to engage in cross border payments without depending on the US financial systems. Thus, for China, digital currency seems to be the route towards countering the dollar dominance as well as to increase its own clout by leading the way for an alternate global financial system operating in digital currencies. It needs to be noted here that EU has succeeded in internationalizing the euro and this can be seen in the fact that EU-Russia trade as well as Russia-China trade occurs predominately in euros now.

Will India follow suit?

Indian economy’s dynamic with dollar is different than other major economies in the world today. Unlike China or Russia (or EU and Japan), which hold dollars in significant amounts, India’s reserve is not resulted by an export surplus. While others accumulate dollars from their earnings of trade surplus, India maintains a large forex reserve even though India imports less than it exports. In India’s case, the dollar reserves come through infusion of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI), which reflects the confidence of foreign investors in India’s growth prospects. However, accumulation of dollar reserves through this route (which helps in offsetting the current deficit faced in trade), India remains vulnerable to policy changes by other nations’ monetary policies which are beyond India’s own control. For instance, it has been often highlighted that a tightening of the US monetary policy leads to capital outflows (capital flight) from India, thus impacting India adversely.

New Dehi has resisted a de-dollarization push for long. Back in 2009, when Russia and China had started the push via BRIC mechanism (Brazil, Russia, India, China grouping), it was argued that New Delhi would not like to upset Washington, especially after the historic US-India civil nuclear agreement was signed just a year before in 2008 -for full civil nuclear cooperation between the two nations.

Further, currency convertibility is an important part of global commerce as it opens trade with other countries and allows a government to pay for goods and services in a currency that may not be the buyer’s own. Non-convertible currency creates difficulties for participating in international market as the transactions take longer routes for processing (which in case of dollar transactions, is controlled by US systems).

 Just like Chinese renminbi, Indian rupee is also not yet fully convertible at the exchange markets. While this means that India can control its burden of foreign debt, and inflow of capital for investment purposes in its economy, it also means an uneasy access to capital, less liquidity in financial market, and less business opportunities.

It can be argued that just like the case of China and Russia, India can also look towards having a digital currency in the near future, and some signs for this are already visible. India can also look towards having an increased share of euros and gold in its foreign exchange reserves, a method currently being used by both China and Russia.  

Conclusion

An increasing number of voices are today pointing towards the arrival of the Asian age (or century). With China now being the leading economic power in the world, US economy on a slowdown, and emergence of an increasing polycentric structure in world economy, the dominance of dollar is bound to witness a shake-up. In order for global systems to remain in sync with the transforming economic order, structural changes like control over leading economic organisations (like IMF and World Bank) will become increasingly desirable.

With an increasing number of nations now looking towards digital currencies and considering a change in the mix of their foreign exchange reserves, a general trend is now visible even if it would not mean an end to dollar’s dominance in the immediate future. As the oil and gas trade in international markets also start shifting from dollar, geopolitical balance of power is expected to witness a shift after decades of US dominance.

Major geopolitical players like China, Russia and EU have already started their journey to counter the dominance of dollar, and the strings of US influence on political decisions that come with it. According to Chinese media, Afghanistan’s reconstruction after US-withdrawal can also accelerate the global de-dollarization push as nations like Saudi Arabia might look for establishing funds for assisting Afghanistan in non-dollar currencies. So, conflict areas highlight another avenue where de-dollarization push will find a testing arena in coming times.

India has several options for initiating its de-dollarization process. Starting from Russia-India transactions, trade with Iran, EAEU, BRICS and SCO members in national or digital currencies can also become a reality in near future. Considering India’s present dollar dependence, whether US sees India’s move towards de-dollarisation as a direct challenge to US-India relations, or accepts it as a shift in the global realities, has to be seen.  

*Mahek Bhanu Marwaha is a master’s student in Diplomacy, Law and Business program at the OP Jindal Global University, India. Her research interests revolve around Indian and Chinese foreign policies and trade relations.

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Economy

Today’s World Demands Sustainability

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In the Brundtland Report, the United Nations defined sustainable development as development that satisfies current demands without jeopardising future generations’ ability to meet their own. It is based on the assumption that resources are finite and should be used sparingly and wisely to guarantee that there is enough for future generations without lowering current living standards. A socially responsible society must prioritise environmental conservation and dynamic equilibrium in human and natural systems.

Pillars of Sustainability

Environmental, social, and economic pillars make up the concept of sustainability, which is sometimes known as profits, planet, and people informally. These are especially important in terms of corporate sustainability and company activities.

The most frequently discussed aspect is environmental protection. As part of a supply chain, it is concerned with reducing carbon footprints, water usage, non-decomposable packaging, and wasteful operations. These procedures can be both cost-effective and beneficial to the bottom line, as well as crucial for environmental sustainability.

Social development entails treating people fairly and ensuring that employees, stakeholders, and the society in which a business operates are treated responsibly, ethically, and sustainably. More responsive benefits, such as greater maternity and paternity benefits, flexible scheduling, and learning and development opportunities, could help achieve this. Businesses should, for example, utilise sustainable labour, which entails adequately compensated, mature employees who can work in a safe atmosphere.

Economic development is probably the most straightforward type of long-term sustainability. A firm must be successful and generate enough money to be economically sustainable in the long run. The difficulty with this type of sustainability is finding a balance. Rather than producing money at any cost, businesses should try to make money in a way that is consistent with other aspects of sustainability.

What can be done to quantify it?

The performance of the three basic principles as a whole, in particular a balanced treatment of all three, is used to assess sustainability. Although the Triple Bottom Line’s three core concepts do not provide a measurement methodology in and of themselves, subsequent approaches of assessing sustainability have attempted to do so. Despite the fact that there is no official universal assessment of sustainability, several organisations are developing industry-specific methods and techniques to assess how social, environmental, and economic principles operate within a corporation.

What Impact Does Sustainability Have on Business?

Sustainability is becoming increasingly crucial for all businesses, regardless of industry. A sustainability strategy is considered necessary by 62 percent of executives today, and another 22 percent believe it will be in the future.

Simply expressed, sustainability is a business strategy for generating long-term value by considering how a company works in its environmental, social, and economic contexts. The concept behind sustainability is that establishing such measures promotes firm lifespan. Companies are realising the need to act on sustainability as expectations for corporate responsibility rise and transparency becomes more widespread.

Executives today face a complex and unprecedented confluence of social, environmental, market, and technology forces. This necessitates comprehensive, long-term management. Executives, on the other hand, are frequently hesitant to make sustainability a priority in their company’s business plan, mistakenly believing that the costs exceed the advantages. Academic research and corporate experience, on the other hand, suggest the exact reverse.

Traditional business strategies prioritise shareholder value creation at the expense of other stakeholders. Sustainable companies are changing the corporate ecosystem by creating models that benefit all stakeholders, including employees, shareholders, supplier chains, civil society, and the environment. The concept of “creating shared value” was pioneered by Michel Porter and Mark Kramer, who argued that firms might generate economic value by recognising and addressing social issues that connect with their business. Much of the strategic value of sustainability stems from the requirement to communicate with and learn from important stakeholders on a regular basis. A corporation with a sustainability agenda is better positioned to foresee and react to economic, social, environmental, and regulatory changes as they happen through regular discussion with stakeholders and continuous iteration.

Moreover, Businesses can benefit from the Triple Bottom Line approach to running a firm in a variety of ways. Meeting UN environmental sustainability requirements is not only ethical and necessary, but it is also cost-effective and enables for a better business model. Furthermore, sustainability allows a company to recruit employees, owners, and consumers who are invested in and share the same values as the company’s sustainability aims. As a result, the impact of sustainability on a company’s reputation and income can be favourable

Why is Sustainability Important for Students

Sustainability is a comprehensive field that provides students and graduates with knowledge of almost every element of human life, from business to technology to the environment and social sciences. The essential skills with which a graduate leaves college or university are in high demand, especially in a modern society seeking to substantially reduce carbon emissions while also discovering and developing future technologies. Politics, economics, philosophy, and other social sciences, as well as the hard sciences, are all used to support sustainability.

As firms seek to comply with new legislation, many corporate occupations at the graduate level and above prioritise sustainability skills and environmental awareness. As a result, sustainability graduates will work in a variety of sectors, including civic planning, environmental consulting (both built and natural environments), agribusiness, non-profit management, corporate strategy, health evaluation and planning, and even law and decision-making. Entry-level occupations are on the rise, and bachelor’s grads may expect more options and opportunities in the future years. Sustainability is one of the newest degree programmes, attempting to combine social science, civic engineering, and environmental science with future technology. When we hear the phrase “sustainability,” we usually think of renewable energy sources, carbon reduction, environmental protection, and a strategy to keep our planet’s delicate ecosystems in check. In a nutshell, sustainability aims to safeguard our natural environment, human and ecological health, while also encouraging innovation and ensuring that our way of life is not jeopardised

Even if you aren’t studying environmental science, sustainability is an important topic to learn about. Sustainability is important for business majors to understand since it helps with customer appeal and Corporate Social Responsibility. Students studying agriculture, nutrition, and public health should concentrate on sustainability to understand how to feed a growing population nutritious and high-quality food. Majors in education pass on their knowledge of sustainability to the next generation, preparing them to lead change. Every major has a link to the environment

The Long Run

As people continue to live more sustainable lives as a result of the climate problem, there is a current drive towards sustainability as a more desirable focus for businesses. Positive climate impact across the entire value chain, improved influence on the environment, people, and atmosphere, and useful contribution into society will most likely be expected of businesses in the future. Companies will be held responsible for all parts of the industry, and any environmental damage or harmful emissions from production operations should be controlled or eliminated. In what is known as a ‘circular economy,’ it is also predicted that resources will be reused to accommodate the global growth in population. This transformation would allow one person’s garbage to become another’s resource, resulting in significant waste reduction and a more efficient supply chain.

As we approach the start of a new year, we’re acutely aware of the growing urgency in the climate movement, as well as the need for action to catch up to ambition. Not only for researchers and policymakers, but for everyone—business executives, negotiators, and communicators—there is still much work to be done. We have a better chance of constructing a sustainable future if we can share what is working.

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