Aug 25, 2022
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Dollar replaced by BRICS single currency

On August 18, during trading on the Moscow Exchange, the volume of transactions with the yuan/Russian ruble pair for the first time in history surpassed the volume of trading with the dollar. Prior to this, the yuan confidently outstripped the euro in popularity.

The decline in demand for the dollar in Russia was stimulated by limited demand for the currencies of unfriendly states due to mutual financial restrictions on the part of the United States and Russia. In addition, payments for imported goods traded in dollars have become extremely complicated, in connection with which professional market participants and citizens who have mastered the basics of exchange trading have turned their attention to alternative currencies, among which the yuan occupies an honorable place.

The growing popularity of the yuan was also supported by the actions of the largest private Russian corporations. Rusal, for example, was the first to issue bonds in yuan in early August, which were immediately noticed by the holders of this currency – a small yield is better than none. There are no problems with the purchase of this currency on the exchange, as well as with its transfer to counterparties and cashing out. Therefore, the yuan was considered a good alternative to the dollar and the euro. Rusal’s example was followed by Polyus, whose yuan bonds will start trading at the end of August. It is likely that other major borrowers will follow the pioneers in the near future.

And yet, despite the growing popularity of the yuan, it is too early to talk about the rapid de-dollarization of the Russian financial system with its subsequent yuanization. There are several reasons for this. The first reason is the huge amount of cash dollars in the hands of the population. Based on indirect calculations based on data from the Bank of Russia, the population may have $90-100 billion in their hands. No one knows what the average value of buying this gigantic amount of money is, but for quite a long time the dollar exchange rate went around the value of 75 rubles per dollar. And this means that most holders of cash currency will not be ready to get rid of it before the exchange rate returns or exceeds this mark.

Only the initiative of the US Federal Reserve System to replace old banknotes with new ones can push to sell the currency at a loss. But if you do it, then on a global scale, which is extremely expensive. This means that the efforts may not be worth the result: the punishment of Russian citizens who keep the dollar under their pillows is not only costly, but also ineffective pleasure, because dollars can be exchanged in neighboring states friendly to Russia.

Secondly, the credibility of the yuan is not too high yet either. Until now, the Chinese authorities have successfully devalued the yuan against the dollar, thereby stimulating the export of their goods, for which the United States has been and remains the largest market. It is this fact – the controlled devaluation of the yuan – among other things, that irritated Donald Trump so much when he was the American president. This means that the exchange rate of the yuan against the ruble cannot be considered a given, determined solely by the course of exchange trading.

It is also important that simply replacing one addiction with another – the dollar for the yuan – is also not an option. In this context, efforts to switch to national currencies in mutual settlements are important. The appearance and growth of popularity in currency pairs against the ruble of the Indian drachma, Turkish lira, Iranian rial and Kazakhstani tenge can be welcomed. However, this can only be considered as a transitional stage. After all, there will always be imbalances in mutual trade, especially taking into account the specifics of Russian exports.

Keeping a large list of currencies on the balance sheets of central banks and administering the most complicated process of settlements in commodity exchange is not easy and expensive. As a result, the unification of countries with a high intensity of mutual trade and common geopolitical interests seems inevitable. One of the most promising such associations is the BRICS, which is about to go beyond the list of states encrypted in its name (with the likely addition of Iran, Argentina, Egypt and other countries as early as next year).

Work on the creation of a single BRICS currency is already underway. But, it must be admitted that this is a lengthy and very complex process, involving far more than just technical issues. First of all, the volume of mutual trade within the BRICS should increase. And this means work on reshaping production and logistics chains, making mutual investments and creating alternative tools for the movement and attraction of capital (exchanges) to Western ones.

A simple example – the assessment of Chinese investment in Russia – demonstrates how much work needs to be done. For example, China’s funding and investment in Russia as part of the key Chinese One Belt, One Road project dropped to almost zero in the first half of 2022. This reduction could be explained by Beijing’s fear of secondary sanctions. But even before that, Chinese investments in Russia were and remain scanty, given the scale of the economies of China and Russia. This means that countries that have challenged US global dominance should at least start by re-prioritizing foreign trade and where their accumulated capital is stored.

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