The lead story in tonight’s Financial Times is Russian companies prepare to pay for trade in renminbi, on how Russian companies are seeking to protect themselves from the impact of possible increasing US sanctions against Russia by denominating more of their foreign transactions in the renminbi and other non-dollar currencies.
The critical question is: how serious a development is this? The short answer is that there is less here than there appears to be. In general, the eagerness to see a declining and increasingly aggressive and inept hegemon get its comeuppance has led a lot of commentators to look forward to the demise of the dollar. However, changes of currency regimes are protracted affairs that typically entail a great deal of instability.
Nevertheless, the US’s deliberate and heavy-handed use of its influence over the international payment system to engage in economic warfare is leading countries like Russia and China to look more seriously than they would have otherwise into to building up independent payment and financing networks. Here, the Rothchilds were far shrewder players. Precisely because they knew their ability to make and break governments would lead to resentment and challenges, they went to some lengths to reduce the visibility of their role in state affairs.
Key sections of the Financial Times’ account:
Russian companies are preparing to switch contracts to renminbi and other Asian currencies amid fears that western sanctions may freeze them out of the US dollar market, according to two top bankers.
“Over the last few weeks there has been a significant interest in the market from large Russian corporations to start using various products in renminbi and other Asian currencies and to set up accounts in Asian locations,” Pavel Teplukhin, head of Deutsche Bank in Russia, told the Financial Times.
Andrei Kostin, chief executive of state bank VTB, said…“Given the extent of our bilateral trade with China, developing the use of settlements in roubles and yuan [renminbi] is a priority on the agenda, and so we are working on it now,” he told Russia’s President Vladimir Putin during a briefing. “Since May, we have been carrying out this work.”
The move to open accounts to trade in renminbi, Hong Kong dollars or Singapore dollars highlights Russia’s attempt to pivot towards Asia as its relations with Europe become strained.
Sanctions are pushing Russian companies to reduce their dependence on western financial markets while US and European banks have dramatically slowed their lending activity in Russia since the annexation of Crimea in March.
The central bank is working to create a national payment system to reduce the country’s dependence on western companies such as Visa and MasterCard.
“There is nothing wrong with Russia trying to reduce its dependency on the dollar, actually it is an entirely reasonable thing to do,” said the Russia head of another large European bank….“There is no reason why you have to settle trade you do with Japan in dollars,” he said….
Alexander Dyukov, chief executive of Gazprom’s oil division, has said that the company has discussed with its customers the possibility of shifting contracts out of dollars, while Norilsk Nickel told the FT that it was discussing denominating long-term contracts with Chinese consumers in renminbi.
There are two issues that are conflated that are actually important to pick apart: the use of the dollar as a means of denominating trade transactions (as in a convention) versus the use of the dollar as a payment mechanism, which then entails the use of dollar-based payment networks.
This is simplified version but will do for the purposes of this discussion. Large US and international banks operating in the US run intra-day balances with each other that they settle up at the end of each business day. The largest transactions run over Fedwire, and payment system experts such as Perry Merhling contend that this system depends on the Fed’s de facto backstopping of the payment system (that is, its lender of the last resort role). The Fed has considerable sway over European banks because they have large dollar exposures, both in the US and the Eurozone (by virtue both of trade transactions and much more important, investment-related exposures). Remember the controversy over the Fed opening up a currency swap line to the ECB during the crisis? The ECB needed to provide dollar financing to European banks that were financing dollar exposures and didn’t have access to the Fed’s discount window. The Fed stepped up in its lender of the last resort capacity (although the ECB was taking the bigger risk of credit loss; the Fed was only exposed to the ECB repayment risk, which was deemed to be minimal).
Similarly, have you taken notice of the furor over the proposed $10 billion in sanctions against BNP Paribas over (mainly) money laundering to Iran? Not only is the French bank also being told it need to plead guilty to criminal charges, but another part of the penalty being sought is being suspended from direct access to dollar payment systems. That alone is a a significant punishment. During the period when BNP Paribas was in the penalty box, it would have to go the more costly route of executing dollar transactions through correspondents. Large customers who have relationships with multiple banks would presumably route business away from BNP to other banks, and they might not switch back when the ban was reversed. As we wrote in 2012, when Lawsky proposed ending the access of another recidivist Iran money launderer, Standard Chartered, to dollar clearing:
[Lawsky’s order] threatens SCB with the loss of its New York banking license and termination of access to dollar clearing services. The latter alone is as huge deal. You are not a real international bank unless you have dollar clearing. Sumitomo Bank looked at giving up its US banking license in 1985 when it was examining deal structures for making an investment in Goldman, and ascertained that giving up access to Fedwire would cost it over $100 million a year and considerably weaken its position in Japan. SCB is certain to be a much more active dollar player than Sumitomo was and the volume of international transactions has grown hugely since then.
While China and Russia looking for more ways to collaborate economically and build more ways of conducting ruble and renminbi transactions outside the US dollar payment network is a step towards reducing US influence, it’s important to recognize that this is only a very modest move. With the US still serving as the consumer of the last resort, China and other exporting nations will have meaningful levels of dollar transactions. And as Claudio Borio and Piti Disyatat stressed in an important Bank of International Settlements paper in 2011, gross cross border capital flows are over sixty times as large as the value of international trade. Much of that is also in dollars.
There is yet another layer of difficulty, if you are a financial firm, of escaping the dollar hegemony. As the ancient-looking 1985 Sumitomo Bank example illustrates, large banks like to provide a wide range of products to corporate customers. The cost of selling to them and servicing them is meaningful, so the more services you can provide, the better the odds of recouping those costs and showing a profit. In particular, smaller international customers can be nicely profitable because they will turn to one or two banks for their international services, and most of them are willing to pay more in return for more hand-holding. Thus, as the Sumitomo case demonstrates, it has long been true that having a gap (and the lack of dollar clearing services is a huge gap) in your product offerings makes you uncompetitive even to customers who only conduct a minority of their business in dollars.
An additional impediment to building an alternative to the dollar now is that there is no credible alternative. The Eurozone has ruled itself now due to its incipient deflation and questionable economic prospects. The renminbi is not yet a candidate because China remains committed to running trade surpluses (a reserve currency issuer needs to run deficits, at least for a sustained period in order to get its currency in foreign hands).
Mind you, the Russian-Chinese effort is an important start, but it is only a start. They are seeking to insulate bilateral transactions from the dollar payment system, and Russian companies are trying to do the same with other non-American customers. Other countries targeted by the US, such as Iran and Syria, and ones interested in promoting alternatives like the renminbi to dollar dominance will likely participate in these efforts. As trade volumes in this trade bloc grows, the depth of services in critical financing activities like international letters of credit will also increase. But even with a clear perceived need among some players, initiatives like this take a long time to reach critical mass and build out the needed infrastructure.
The Russians appear to be realistic about what they are up against:
But while in recent discussions with big business about how to make the economy less vulnerable the government has advocated listing back home and settling more trade in currencies other than the dollar, it has rejected more extreme measures.
“As long as Russia is not subject to systemic sanctions, which could bring an artificial limit to our economy’s access to dollars . . . then I don’t think Russia will take any steps in order to bring about artificial de-dollarisation,” said Andrei Belousov, economic adviser to Mr Putin.
And even if the Russians harbor bigger aims, given the time it would take to achieve them, better to under-promise and stealthily out-deliver than announce a course of action that would provoke more aggressive US measures now. Like it or not, the dollar is and will remain the reserve currency for quite some time, and the Russians understand the implications.
The necessity will bring speed.. especially when the grey pyramid starts to crumble down..
Hegemony under the $USD will be very hard to break, especially if one understands MMT and the stranglehold that the USA has over financial transactions on a global basis. Regardless, I hope for the best in breaking that stranglehold.
Perhaps the U.S. is exaggerating a bit in the arbitrary character of the financial sanctions that it has been applying lately – not only against Russian players (individual companies and/or personalities, selected by the POTUS himself according to the degree of their alleged “ties to Putin”) but European ones also, as we have witnessed in the recent Swiss and French cases.
After all, one of the main reasons for the hegemony of the dollar has been its safety as an asset for investors. For decades, people felt that holding dollars and parking them under the American umbrella would translate into a guarantee against confiscation and other arbitrary measures. There was trust in the dollar when America, in the eyes of international investors, stood for the rule of law – at least in financial matters. For those investors, holding dollars meant predictability.
Slowly but surely, this key element of trust is slipping away. It’s becoming clear that if one happens to have the bad luck of belonging to a nation that the U.S., for some reason, starts to target for sanctions (or even to a third party who merely engages in commerce with said nation) then harsh penalties and ultimate freezing and confiscation of dollar assets may suddenly become a real threat.
However, for this uneasiness with the increasing financial unpredictability of the U.S. to translate into the rapid creation of an alternative to the dollar system Western Europe would have to support the incipient efforts of other powers such as the BRICS to break free from the “dollar straitjacket”.
The EU and the BRICS together represent more than half of the world’s economy – if they really decided to opt for a new international payments system the dollar hegemony might simply vanish in a matter of years, instead of decades.
But who knows – perhaps the Ukrainian crisis will provide a stepping stone for such a development. If (admittedly, a large “if”) Russian diplomacy turns out to be shrewd enough to seize the initiative there with the purpose of slowly de-coupling the EU from the U.S. then the tables could start to turn – and American exceptionalism and its dollar corollary might rapidly slide into comparative irrelevance.
One should mention in passing that the phrase ‘Iran money launderer’ describes a political crime.
‘Money laundering’ is a victimless offense that was created out of whole cloth in 1986 as an adjunct of the drug war. It is useful to the U.S. authorities for ‘piling on’ of charges, as well as for extortion of banks.
Since trade is generally beneficial, facilitation of trade with Iran is actually a public service which, at the margin, helps to bring down energy prices. That it also tweaks the nose of the Lobby is a happy side benefit.
I’d not call money laundering a victimless crime, see Swiss and Nazis for an extreme example. But if you wanted to rephrase it that any law can be bent, and designating Iran as criminal for political reasons may be dumb, then we can agree. IIRC, there were more cases of “normal” criminal extradictions from the UK to the US than for “terrorists” which the law was written for. As usual, the real danger in “terrorist” laws is not the law itself, but who can be designated terrorist (or who it can be applied to easily).
At the end of the day, Russia is selling oil to China so it can burn it. Is this energy being used to make products that feed the US, Russia or China?
If this contract contributes to the expansion of the amount of energy getting burned without benefiting the US, it means erosion of its hegemony. The rest follows in due time.
Now we wait for the d-day when China tells No1 that those deficit dollars isn’t good enough, give us Renminbi, Rubles, Peso, Gold or what ever but those decayed deficit dollar.
Otherwise we won’t deliver those iPhones and lead painted Barbie dolls to you. :-)
correction: the “lead” painted Barbie dolls ? you can have them for free !
Eric Snowden recently released this tweet documenting his conversation on Ruble Hegemony with Vlad Putin:
Vlad: I want ruble to be hegemon too. How does America accomplish such thing?
Eric: It’s all done with computers.
Vlad: Ah, I see. Maybe. Please explain anyway.
Eric: The most important thing is “Loans Precede Deposits”. America uses computers to keep track of that.
Vlade: Ya, but what if I don’t want a loan and just want to pay for something?
Eric: In our model, everything is a loan. Even if it’s only for a few hours between bank transfers. Then they make deposits to each other and everything is all squared up.
Vlade: I see. I think. So this big word game? What if Vlade only want money for 8 milliseconds for stock trade? You yanks call that loan too?
Eric: You’re picking nits now, Vlade. I’m just trying to explain this, so don’t try and confuse things.
Vlade: Ok, maybe you write book someday. But for now, everything “loan”. So what next. I haven’t got all day.
Eric: You buy American computers and software for your banks.
Vlade: I can put you on plane to Washington if you insist on being wise ass.
Eric: Calm down, Vlade. China makes American computers. India makes American software. You tell them you will buy these things with rubles. But have them make them without “bugs”. [wink wink]
Vlade: What if they say “No”?
Eric: You tell them you will sell them Russian oil and gas for rubles.
Vlade: Yes, I can do that. I am Russia! But I see one problem. America has to run trade deficit to be strong like Hegemon. How can Vlade do such a thing if he has energy surplus?
Eric: You have your central bank do currency swaps with your trading partners’ central banks. That way you both have each others Hegemon and you all can still run trade surpluses and not worry about becoming a weak Hegemon.
Vlade: That would work?
Vlade: But one more problem. Russian bankers are bunch of crooks. What if they screw up and piss off trading partner and not have right Hegemon deposit for loan? Vlade’s reputation at stake here!
Eric: You have the central banks agree to do whatever currency swaps are necessary to “backstop” these deposits. The loans always get paid that way.
Vlade: Ok, but why do I need crooked Russian banker for international trade then? Vlade just do it with state central bank. Vlade has oil deposits!
Eric: That would work.
Vlade: Ok then. So how do you like name “First Loan and Deposit Soviet bank”?
Eric: Nice ring to it….
I object of having my nick used as Putin’s. Given that Yves knows my identity, I believe I can easily say I’m not Mr. Putin.
N’k, so yesterday I read and listened to this guy, Ben Davies. He had an interview with former Greek Prime Minister George Papandreou.
Davies asked: “Had policymakers at the highest level discussed a change of the monetary order when you were in charge of the Greek political system?”
He (Papandreou) was very thoughtful about this. He said to me, “Yes, beyond austerity, beyond reforms, there had been deep conversations about how to change the monetary order.” I asked, “Did this include a gold standard?” What he told me was, “It was about exploring a basket of currencies that could involve an asset like that (gold).” I asked, “Are you referring to an SDR (Special Drawing Right)?” And he said, “Yes. It would be along those lines.”
(Listening to his entire podcast, too, was interesting)
SO, I just googled this: “is the BIS considering SDRs to replace the USD as reserve currency?”
I got this paper– Reforming the International Monetary System in the 1970sand 2000s: Would an SDR
Substitution Account Have Worked? http://www.bis.org/publ/work444.pdf
Now this is all Greek to me. As far as I know, the BIS trumps the IMF and the World Bank as far as cache, but what do I know.
What’s my point? I keep reading hair-on-fire articles about the demise of the USD as the world reserve currency which is financial armageddon, yaddayaddayadda. The New World Order wants a one-world currency, a basket of currencies and/or SDR’s, which means the sky is falling and the universe as we know it will cease to exist, blahblahblah…. and yet the BIS, who could actually be a part of implementing this, says it’s too difficult/complicated- nah gah happin.
So if the Russians and the Chinese and the BRIICS and all decide to do business in their own currencies, it really doesn’t seem to be such a bad thing. Decentralization=good thing, imo.
If the US Gov’t, being run by the McCain/Hagan/Obama/Clinton Neo-Con-Libs, who are desperate to start WW3, get their collective legs knocked out from under them, right where it hurts, in their wallets, well, I can’t see how that is anything but a good thing.
Ah ha! Look what I just found in zerohedge comments section. SDR’s are so passe. The new kid on the block… WOCU.
Is Obama now running around threatening western bank? BNP now receive dollar stop clearing threat.
Sooner or later Obama will destroy dollar and isolate US economy. Destroying dollar flow is the easiest thing to do in the world right now with several largest oil exporters moving out of dollar and china increasing Yuan internationalization pace.
This threat was on the table from the beginning of the settlement talks.