Sanctions have created a new world of countries trying to trade in their own currencies instead of the US Dollar. These new partnerships are picking up speed because global trade and commerce with Russia in an interconnected world has become almost impossible.
China, the main challenger to the U.S. dominated international order, is doing this through trade in the renminbi, and is now gunning for the petrodollar. Driven by sanctions on Russia, China and Russia are conducting much of their trade in bilateral currencies.[1] China is a leading promotor of using its renminbi for trade, including trade in oil.[2] Earlier this year, Argentina and Brazil proposed a common currency for bilateral trade.[3] Brazil and China have signed an agreement to shift trade to bilateral currencies.[4] Brazilian President Lula da Silva has openly called for replacing the greenback with a BRICS currency for trade within the grouping.[5]
China has long wanted its Yuan to supplant the US dollar as an international medium of exchange. In 2016, the Yuan was added to the basket of currencies used by the IMF to calculate SDR (Special Drawing Rights).[6] This was also the year when China set up the Asian Infrastructure Investment Bank, its own version of Western driven institutions such as the World Bank and the ADB. The Bank has global support from more than 90 countries – and India is the second largest shareholder. China has consistently pushed for the use of Yuan in bilateral trade for countries such as Pakistan[7] which are within its dependence circle.[8] It’s slow going: the share of the Chinese Yuan in international forex reserves remains at under 3%.
IN the near term, it is unlikely that the dollar will be replaced by the Yuan or a basket of BRICS currencies. A fiat currency, such as Dollar, the Euro or the Yuan relies on the trust in the government issuing that money. While the US government has abused this trust by the means of sanctions and creating excessive money by issuing government debt, the alternatives are less dependable. For instance, in the case of China, the crackdown on Alibaba raises a question of basic security – if the assets of one of the best-known entrepreneurs in the world are not safe, then can you really trust that currency/government. This will restrict Chinese Yuan to countries which are either locked out of regular commerce or are otherwise dependent on China. In the case of Brazil, there have been multiple currencies since the 1980s – an unlikely haven for someone trying to preserve assets.
The dollar is currently the least bad currency compared to such options such as the Chinese Yuan and is therefore unlikely to be ‘replaced’ in a hurry. However, the ongoing sanctions on Russia show why reliance on a single currency for global trade is no longer feasible.
The dominance of the American dollar in global trade allows the US to shut down international trade for entire economies. For instance, Venezuela and Iran are both rich in petroleum and were major oil suppliers to India in the past. In both the cases, trade came to a virtual halt due to US sanctions. Among India’s neighbours, Myanmar too has been under various sanctions, tightened after the recent coup. India too, has been targeted by Western sanctions after the 1974 and 1998 nuclear tests.
These sanctions prohibit individuals and companies (including Banks) from facilitating certain transactions with entities in target countries. Since much of the global trade is denominated in US dollars, sanctioned entities (and countries) can no longer access the US banking system and are locked out of global commerce. This makes companies wary of doing business with sanctioned countries, and makes US sanctions effective, even though many governments don’t recognize them.
Sanctions on Russia, Iran and Myanmar are likely to stay for a long time and other countries may be targeted by Western sanctions in the future. This fear is key. India must prepare alternative payment systems and start implementing them for the long run. Rather than ‘replace’ the dollar, the aim should be to create parallel systems that can enable commerce.
The Indian rupee can attempt to provide one such mechanism. It has a history. Till the 1971, the Indian rupee was used as currency by many Persian Gulf states – the UAE, Kuwait, Bahrain etc, till repeated devaluations drove these countries to come up with their own currencies. Now, as India regains its economic weight, the rupee is starting to play a role in other countries. India’s United Payment Interface (UPI) allows accountholders to make payments using their smartphones – and is also accepted outside India in Singapore and the UAE, Mauritius, Nepal and Bhutan.
The Indian rupee can play a larger role in international commerce as well. India has recently permitted settling of international trade with 18 countries in the Indian rupee.[9] India can actively encourage bilateral trade with neighbours such as Bangladesh and Sri Lanka using the Indian rupee. As things stand, the total number of Indian bank branches in the Bay of Bengal neighbours – Bangladesh, Myanmar, Sri Lanka and Thailand – is just 11. This needs to change. State-owned banks, such as the UCI Bank – which in the past has facilitated trade with Iran – need to be expanded to these countries as well. Bilateral trade with these countries is more balanced and given the balance of payment worries of Sri Lanka and Bangladesh, it may be possible to shift some of this to INR.
While India’s economy is much smaller than China’s, India has a better chance at internationalizing its currency as compared to China. This is because the Indian economy is more market-driven compared to China and more transparent. There is a greater respect of property and individual rights. But Indian central bankers and commerce ministry officials need to step up their game to strengthen this advantage. A good first step will be to ensure predictability of policy and avoid measures such as demonetization and angel tax.
Amit Bhandari is Senior Fellow for Energy, Investment and Connectivity, Gateway House.
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References
[1] Zhou Lanxu, ‘Yuan’s rise in Russia shows currency trend,’ China Daily, Apr 12, 2023, https://www.chinadaily.com.cn/a/202304/12/WS6435f046a31057c47ebb999d.html.
[2] Maha El Dahan, ‘China’s Xi calls for oil trade in yuan at Gulf summit n Riyadh,’ Reuters, Dec 10, 2022, https://www.reuters.com/world/saudi-arabia-gathers-chinas-xi-with-arab-leaders-new-era-ties-2022-12-09/.
[3] Lisandra Paraguassu, ‘Brazil and Argentina to discuss common currency,’ Reuters, Jan 23, 2023, https://www.reuters.com/markets/currencies/brazil-argentina-begin-preparations-common-currency-ft-2023-01-22/
[4] ‘Brazil & China Sign Agreement to Drop US Dollar and Use RMB Yuan – Real in Bilateral Trade,’ Silk Road Briefing, Mar 21, 2023, https://www.silkroadbriefing.com/news/2023/03/31/brazil-china-sign-agreement-to-drop-us-dollar-and-use-rmb-yuan-real-in-bilateral-trade/.
[5] Simone Iglesias, ‘Lula Backs BRICS Currency to Replace Dollar in Foreign Trade,’ Bloomberg, Apr 13, 2023. https://finance.yahoo.com/news/lula-backs-brics-currency-replace-140204909.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAE2UcgeU9vPrn2xekfwEqV1cAFovQohC2JKf-BvykwC8-KlkTmGYetyBxaIh8e3m5myR2XyHuyYmszDXC4UnYhwDMNC3vVJNInq7_PPw2Sg41PlGy_SJ93ywRQ-C3V_5IbINOHbQ4nffFPe44nThFlEs1T8wrCosBMAijbe7qN6x.
[6] ‘IMF Adds Chinese Renminbi to Special Drawing Rights Basket,’ IMF News, Sept 30, 2016, https://www.imf.org/en/News/Articles/2016/09/29/AM16-NA093016IMF-Adds-Chinese-Renminbi-to-Special-Drawing-Rights-Basket.
[7] ‘Pakistan Drops US Dollar, Euro to Trade With China in RMB Yuan,’ Silk Road Briefing, Apr 17, 2023, https://www.silkroadbriefing.com/news/2023/04/17/pakistan-drops-us-dollar-euro-to-trade-with-china-in-rmb-yuan/.
[8] Henning Gloystein, ‘Shanghai crude futures eat into Western benchmarks as China pushes yuan,’ Reuters, Aug 31, 2018, https://www.reuters.com/article/us-china-crude-oil-futures-analysis/shanghai-crude-futures-eat-into-western-benchmarks-as-china-pushes-yuan-idUSKCN1LF2RE.
[9] Reserve Bank of India, ‘International Trade Settlement in Indian Rupees (INR),’ July 11, 2022, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12358&Mode=0.