June 9, 2014
As we have been reporting (and forecasting for the past several years), the Eurasian anti-US Dollar axis is rapidly taking shape, with recent events catalyzed and certainly accelerated by US foreign policy in Ukraine, which has merely succeeded in pushing Russia that much closer, and faster, to China. The latest proof of this came overnight when the FT reported thatRussian 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.
According to Pavel Teplukhin, head of Deutsche Bank in Russia, cited by the Financial Times, “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.”
Andrei Kostin, chief executive of state bank VTB, said that expanding the use of non-dollar currencies was one of the bank’s “main tasks”. “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.”
“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. He added that Russia’s large exposure to the dollar subjects it to more market volatility in times of crisis. “There is no reason why you have to settle trade you do with Japan in dollars,” he said.
The chief executive of a Russian manufacturer that derives 70 per cent of its revenues from export in US dollars said his company had done the groundwork to move its contract settlements to different currencies in the event of further sanctions. “If something happens, we are ready to switch to other currencies, for example to the Chinese yuan or the Hong Kong dollar,” he said.
While 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”, is hardly surprising given recent events, one wonders how much of last night’s sudden bout of renminbi strength may be due to Russian capital inflow. And while that particular move was certainly more driven by the PBOC and recent rehypothecated metal concerns pushing Chinese imports lower, the biggest question is how will Russian demand for the Chinese currency impact what has been a clear trend in recent months by Chinese authorities to weaken the national currency.
The punchline, again, is that what Russia is doing is merely the appetizer of what other G-20 countries, many of which already angry at the US over IMF voting power shennanigans, may end up doing in their own bilateral trade arrangements with China which suggest even further de-dollarization as the Renminbi becomes progressively more important on the global FX stage.
“It looks like this is not just a blip, this is a trend,” said Mr Teplukhin of Deutsche Bank. He added that Russian companies were able to hedge the risk of further US sanctions by “changing the letter of their contracts to allow them to change currency if it is necessary”.
But perhaps most important are the next steps laid out by the Kremlin which has explained under what conditions it will “de-dollarize” more:
Some politicians have suggested Moscow should respond to western sanctions by entirely “de-dollarising” its economy. 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.
In other words, as we said all along, more western sanctions, more dropping of the USD. And now Russia has the trump card, because if it wants to show the world that the Russia-China axis does not need Uncle Sam’s greenbacks, it just needs to be more “aggressive” toward Ukraine setting off new sanctions, and being “forced” to de-dollarize that extra bit more. Rinse, repeat.
This article was posted: Monday, June 9, 2014 at 8:53 am