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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.

Divyanshu Jindal is a doctoral student at OP Jindal Global University, India.

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Economy

Accelerating COVID-19 Vaccine Uptake to Boost Malawi’s Economic Recovery

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Lunzu market in southern Malawi. WFP/Greg Barrow

Since the onset of the COVID-19 pandemic, many countries including Malawi have struggled to mitigate its impact amid limited fiscal support and fragile health systems. The pandemic has plunged the continent into its first recession in over 25 years, and vulnerable groups such as the poor, informal sector workers, women, and youth, suffer disproportionately from reduced opportunities and unequal access to social safety nets.

Fast-tracking COVID-19 vaccine acquisition—alongside widespread testing, improved treatment, and strong health systems—are critical to protecting lives and stimulating economic recovery. In support of the African Union’s (AU) target to vaccinate 60 percent of the continent’s population by 2022, the World Bank and the AU announced a partnership to assist the Africa Vaccine Acquisition Task Team (AVATT) initiative with resources, allowing countries to purchase and deploy vaccines for up to 400 million Africans. This extraordinary effort complements COVAX and comes at a time of rising cases in the region.

I am convinced that unless every country in the world has fair, broad, and fast access to effective and safe COVID-19 vaccines, we will not stem the spread of the pandemic and set the global economy on track for a steady and inclusive recovery. The World Bank has taken unprecedented steps to ramp up financing for Malawi, and every country in Africa, to empower them with the resources to implement successful vaccination campaigns and compensate for income losses, food price increases, and service delivery disruptions.

In line with Malawi’s COVID-19 National Response and Preparedness Plan which aims to vaccinate 60 percent of the population, the World Bank approved $30 million in additional financing for the acquisition and deployment of safe and effective COVID-19 vaccines. This financing comes as a boost to Malawi’s COVID-19 Emergency Response and Health Systems Preparedness project, bringing World Bank contributions in this sector up to $37 million.

Malawi’s decision to purchase 1.8 million doses of Johnson and Johnson vaccines through the AU/African Vaccine Acquisition Trust (AVAT) with World Bank financing is a welcome development and will enable Malawi to secure additional vaccines to meet its vaccination target.

However, Malawi’s vaccination campaign has encountered challenges driven by concerns regarding safety, efficacy, religious and cultural beliefs. These concerns, combined with abundant misinformation, are fueling widespread vaccine hesitancy despite the pandemic’s impact on the health and welfare of billions of people.  The low uptake of COVID-19 vaccines is of great concern, and it remains an uphill battle to reach the target of 60 percent by the end of 2023 from the current 2.2 percent.

Government leadership remains fundamental as the country continues to address vaccine hesitancy by consistently communicating the benefits of the vaccine, releasing COVID data, and engaging communities to help them understand how this impacts them.

As we deploy targeted resources to address COVID-19, we are also working to ensure that these investments support a robust, sustainable and resilient recovery. Our support emphasizes transparency, social protection, poverty alleviation, and policy-based financing to make sure that COVID assistance gets to the people who have been hit the hardest.

For example, the Financial Inclusion and Entrepreneurship Scaling Project (FInES) in Malawi is supporting micro, small, and medium enterprises by providing them with $47 million in affordable credit through commercial banks and microfinance institutions. Eight months into implementation, approximately $8.4 million (MK6.9 billion) has been made available through three commercial banks on better terms and interest rates. Additionally, nearly 200,000 urban households have received cash transfers and urban poor now have more affordable access to water to promote COVID-19 prevention.

Furthermore, domestic mobilization of resources for the COVID-19 response are vital to ensuring the security of supply of health sector commodities needed to administer vaccinations and sustain ongoing measures. Likewise, regional approaches fostering cross-border collaboration are just as imperative as in-country efforts to prevent the spread of the virus. United Nations (UN) partners in Malawi have been instrumental in convening regional stakeholders and supporting vaccine deployment.

Taking broad, fast action to help countries like Malawi during this unprecedented crisis will save lives and prevent more people falling into poverty. We thank Malawi for their decisive action and will continue to support the country and its people to build a resilient and inclusive recovery.

This op-ed first appeared in The Nation, via World Bank

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An Airplane Dilemma: Convenience Versus Environment

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Mr. President:  There are many consequences of COVID-19 that have changed the existing landscape due to the cumulative effects of personal behavior.  For example, the decline in the use of automobiles has been to the benefit of the environment.  A landmark study published by Nature in May 2020 confirmed a 17 percent drop in daily CO2 emissions but with the expectation that the number will bounce back as human activity returns to normal.

Yet there is hope.  We are all creatures of habit and having tried teleconferences, we are less likely to take the trouble to hop on a plane for a personal meeting, wasting time and effort.  Such is also the belief of aircraft operators.  Add to this the convenience of shopping from home and having the stuff delivered to your door and one can guess what is happening.

In short, the need for passenger planes has diminished while cargo operators face increased demand.  Fewer passenger planes also means a reduction in belly cargo capacity worsening the situation.  All of which has led to a new business with new jobs — converting passenger aircraft for cargo use.  It is not as simple as it might seem, and not just a matter of removing seats, for all unnecessary items must be removed for cargo use. They take up cargo weight and if not removed waste fuel.

After the seats and interior fittings have been removed, the cabin floor has to be strengthened.  The side windows are plugged and smoothed out.  A cargo door is cut out and the existing emergency doors are deactivated and sealed.  Also a new crew entry door has to be cut-out and installed. 

A new in-cabin cargo barrier with a sliding access door is put in, allowing best use of cargo and cockpit space and a merged carrier and crew space.  A new crew lavatory together with replacement water and waste systems replace the old, which supplied the original passenger area and are no longer needed.

The cockpit gets upgrades which include a simplified air distribution system and revised hydraulics.  At the end of it all, we have a cargo jet.  If the airlines are converting their planes, then they must believe not all the travelers will be returning after the covid crisis recedes.

Airline losses have been extraordinary.  Figures sourced from the World Bank and the International Civil Aviation Organization reveal air carriers lost $370 billion in revenues.  This includes $120 billion in the Asia-Pacific region, $100 billion in Europe and $88 billion in North America.

For many of the airlines, it is now a new business model transforming its fleet for cargo demand and launching new cargo routes.  The latter also requires obtaining regulatory approvals.

A promising development for the future is sustainable aviation fuel (SAP).  Developed by the Air France KLM Martinair consortium it reduces CO2 emissions, and cleaner air transport contributes to lessening global warming.

It is a good start since airplanes are major transportation culprits increasing air pollution and radiative forcing.  The latter being the heat reflected back to earth when it is greater than the heat radiated from the earth.  All of which should incline the environmentally conscious to avoid airplane travel — buses and trains pollute less and might be a preferred alternative for domestic travel.

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Economy

There Is No Business, Like Small Business: New Strategy

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Marc Chagall, Circus Horse, 1964

Once upon a time, all big businesses of the world were only small businesses. However, occasionally, when big businesses classified as too big to fail, it is the special status when they start failing their own nations, damaging common good, hurting humankind at large. This is when big business allowed to morph into a Godzilla to trample all over the governments and institutions and line them up as hostages. Study the rise and fall of the world’s largest business empires of last century. 

Now Showtime: There is no business, like small business, because the small business sector is not only a giant business, but also the biggest layer of the economy, largest contributor in kind to its nation, adding jobs, paying taxes and creating real value creation, while taking all the abuse and bureaucratic nonsense.  Hence, post pandemic recovery will take no prisoners and harshly unleash economic challenges as mirror on the economic development competency and question national priorities. Here, no worries, as usual the big business will always take care of itself. Small business will be the only game left in town, something for the political leadership to cling on to and something for local trade groups to try to claim as success. The definitions on what is big and what is small are both on the table for honest evaluation and equally juxtaposed need a declaration on what business serves the economy of the nation and what business destroys the economies of nation.

New math of the post pandemic world clearly shakes down old mindsets. Unless national economic development leaders, trade groups and trade associations acquire proven entrepreneurial experiences, expertise and tactical battlefield capability at the very top and display a warrior mindset to upskill for global competitive excellence, they are just a dance party with water pistols.  Entrepreneurialism is the real value creation driving force behind the economy and not a value manipulation exercise with some certificates. Any misunderstanding on such issues only creates shiny cities, surrounded by tent-cities. Study the global economic chaos and worklessness is creeping across the world.

The illusion of super big technology driving super global growth is another myth of crypto-tyrannies. The worshiping super magnanimous technologies, including Facebook engaged in stealing the future from the next generations, now manipulating data to divide and conquer elections and serving special agenda groups causing tribalism and global socio-economic damage. Study how the future routinely stolen in broad daylight by Social Media. 

Mutation of economic thought:  Why is creation of fake economies much easier; this is where zeros bought, sold and traded as real assets, everything multiplied, subtracted, divided but nothing adds up, there are no bottom-line totals, ever. When columns do not fit anywhere, like an abstract art on canvas, for the eye of the beholder they glow in the dark. Hence, cubism-finances  and impressionist-economies, while on the other hand, real value creation economy is one of the hardest journeys,it isrealentrepreneurialism wrapped in integrity and solid hard day’s work creating common good. The reason is that small medium businesses have lost trust in their government and major institutions, while they paint the economy as abstract art and print invisible unlimited money but SME only thrown in jail if they only photocopy a dollar bill.  Covidians demand a new narrative on economic affairs and overall totals of budgets.

Unless trade groups of nations assembled and thanked profusely for their work done over the last century. Invited to join as new players, as this is now a new page for a new age and a new direction for a new digital future. Let meritocracy chart out the future of trade-groups; let vertical sectors build their own independent global age narratives to ride on entrepreneurial mindsets. When methodical agenda on simultaneous synchronization bring all key components under master plan tabled critical thinking and hardcore business experiences should lead. When vertical groups and all upskilling and reskilling features interact on digital platforms combined, eventually they will all see the light and most importantly learn the future of the global-age of digital commerce. Upskilling of all layers is critical so all grow together. Reskilling to create real value production is essential so it becomes a sustainable model. 

With no room to spend another decade on some academic feasibility studies, organize a warrior team to undertake such mobilization developments. Such national mandates are often not new funding dependent rather execution starved and deployment hungry. Why shut down the electricity of the building and climb the skyscraper via the staircase.  With the majority of nations locked up in an old mindset on digitization, today, they simply cannot zip up to the top floor, exhausted and breathless as they are climbing stairs and badly stuck on lower floors.  Pandemic recovery is harsh. Fire the first person who says they need heavy new funding, fire the second person who says they are too busy to change. Change is a gift for free but for the right mindset.

The New Trends: National mobilization of entrepreneurialism will advance; small and medium businesses will grow, as they have no choice but to upskill innovative excellence and reskill for quality manufacturing of goods and services. Learn from Asia, study Africa, stop reading newspapers but the world maps, acquire new math from ‘population-rich-nations’, and expand collaborative alliances with the knowledge-rich-nations to reach global markets.

New Trends on Small Medium Business Economy:

The new math:  why all over the world it is now attracting new entrepreneurs at rapid speed? Why are Covidians all over the world refusing high-rise, low pay, cubical-slavery and transforming to creative freedom, global-age access and hammocks. Today a USD $1000 investment in technology buys digital solutions, which were million dollars, a decade ago. Today, any micro-small-medium-enterprise capable of remote working models can save 90% of office and bureaucratic costs and suddenly operate like a mini-multi-national with little or no additional costs.

The new uplifts: How struggling economies are now exploring the “National Mobilization of Entrepreneurialism on Digital Platforms of Exportability Protocols” as alternate revolutionary thinking. Study how Africa model under Dr. Ameenah Gurib-Fakim is expanding and why the groups of western developed economies are so fearful of such a mega shift in thinking. Study Expothon on Google.

The new speed: If Agrarian age to industrial age took a millennia, while industrial age to computer age took a century, now from cyber-age to paperless, cash-less, office-less and work-less age it is almost knocking the door, just open and see. Is this the revenge of The Julian Calendar, time like a tsunami drowning us in our own depths of performance, challenging our lifelong learning and exposing our critical thinking forcing us to fathom the pace of change, swim or drown?

Time to study deeply, why forest fires always put out by creating more selected fires;  therefore let government and bureaucracy stay where they are, while creating a far superior brand new meritocracy centric digital firefighting unit to act at the top and bring required results. The cost is a fraction of what routinely wasted 1000 times in lost and missed opportunities.

Time to appreciate, why is the fear of exposure of limited talent the number one fear of adapting digitizationas digital-divide is just a mental-divide.Why without digitization there is no economy and why it has taken decades?

Time to apply entrepreneurial mindset, why incentivizing all frontline management of all midsize business economic development and foreign investment attraction and export promotion bodies is a requirement of time? Observe the power of entrepreneurial mindset in the driver seat, deploy national mobilization of midsize economies, accept upskilling as a national mandate, and digitization as national pride.

Is there any authoritative leadership on entrepreneurialism present in the boardroom?  No need to have chills, as mainly from Asia, there are some 500 million new entrepreneurs already on the march, therefore, no need to ask where are they headed but rather ask where your national entrepreneurialism is going? Study why entrepreneurialism is neither academic-born nor academic centric, why all most successful legendary founders that created earth shattering organizations were only the dropouts?

Is there a new realization or back to water pistol games? Not to be confused with academic courses on fixing Paper-Mache economies and already broken paperwork trails, chambers primarily focused on conflict resolutions, compliance regulations, and trade groups on taxation policy matters.  Mobilization of small medium business economy is a tactical battlefield of advancements of an enterprise, as meritocracy is the nightmarish challenges for over 100 plus nations where majority high potential sectors are at standstill on such affairs. Surprisingly, such advancements are mostly not new funding hungry but mobilization starved. Observe the trail of silence. The empty shelves are not supply chain issues but symptoms of broken down economies. Economies are not cryptopia; they are about real value creation by the local small medium business forces to create local grassroots prosperity. The failure is not having the right mindsets.

Five things to watch for the year 2022: US election will surprise the world as it has the last two times. World economies tested, financially along with leadership competency levels. Big business will remain big and undisturbed.  The Covidian will march for truth. Small medium business mobilization will further grow as a reliable answer to the economy and jobs.This is how humankind will crawl towards critical thinking.

The rest is easy

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