Putin supports plan to de-dollarize

Putin supports plan to de-dollarize
VTB Bank head Andrey Kostin told the Russian news agency, RIA Novosti that President Vladimir Putin supports the working plan of de-dollarizing the Russian economy. The Russian economy is a mixed economy with state ownership in many strategic areas. The market reforms of the 1990s privatized much of the Russian...

VTB Bank head Andrey Kostin told the Russian news agency, RIA Novosti that President Vladimir Putin supports the working plan of de-dollarizing the Russian economy.

Background

The Russian economy is a mixed economy with state ownership in many strategic areas. The market reforms of the 1990s privatized much of the Russian industry and agriculture, with notable exceptions occurring in the energy and defense-related sectors. According to the World Bank, the total value of Russia's natural resources is at $75 trillion US dollars. Russia relies on energy revenues to drive most of its growth. Russia has an abundance of oil, natural gas and precious metals, which make up a major share of Russia's exports.

De-dollarization: refers to a situation when a country decides to no longer fully or partially dollarize, i.e., when a foreign currency is used in addition to or instead of the domestic currency as legal tender. A policy of dollarization is undertaken to reap the benefits of a stability in the value of the foreign currency over a domestic currency. However, dollarization will result in a country needing to give up its ability to influence its own monetary policy through adjustment of its money supply.

Analysis

The Russian government says it has been working on plans to de-dollarize Russia’s $1.6 trillion-dollar economy and wean its biggest industries off the US currency. Andrey Kostin, the head of VTB Bank told RIA Novosti that President Vladimir Putting supports this plan of de-dollarization of the Russian economy.

Andrey Kostin had earlier presented a plan which highlighted four priority tasks that the economy must fulfil in order to free it from the dependence on the dollar. His proposals were supported by the Russian Ministry of Finance. The idea of de-dollarizing the Russian economy has been actively discussed in the country due to the tightening of US sanctions. Discussions further intensified after a bill was introduced to Congress in August with a whole range measures targeting Russian financial institutions.

The Russian Foreign Minister Sergei Lavrov had recently made a comment asserting that over time the role of the U.S. dollar as the currency of global trade will decline. Additionally, in an interview with International Affairs magazine, he said: “The time has come when we need to go from words to actions, and get rid of the dollar as a means of mutual settlements, and look for other alternatives”.

The press service had earlier reported that the objective of the Russian government is to reduce the dependency on the dollar and this can be achieved if the transactions are stimulated in the national currency. To this end, the Kremlin has sought to strike deals with major trading partners to use the Russian rouble for imports and exports. This move had generated positive responses from countries that experience a similar strained relationship with the US such as China and Turkey.

Russian is not the only country who intends to reduce the pre-eminence of the US dollar as reserve currency. The South Korean finance minister had stated that his country would start trading with Iran using the Euro on 29th August. He said that this move would “greatly resolve obstacles that stood in the way of facilitating investment and trading with Iran.”

The New Development Bank announced in July that it would issue 3-billion-yuan worth of five-year “green bonds” denominated in the Renminbi to raise funds for clean energy and infrastructure projects. Also, freight carriers have refused to accept dollar payments for cargo that are being shipped to Japan from Singapore. They are requesting Japanese Yen or South Korean Won instead.

Counterpoint

The Russian government's plan does not suggest any restrictions or bans on transactions in dollars, its main goal is to simplify settlements in national currencies, to facilitate exchange controls and to create convenient mechanisms that will allow payments in any currency without unnecessary losses.

The US dollar is very important in the economy mainly due to the huge amount of petrodollars and its significance as the world’s reserve currency. In addition, the US currency is still a large part of the Special Drawing Rights (SDR).

Assessment

Our assessment is that this is an important decision for Russia. While on the one hand, de-dollarization could increase the demand for US goods, it will significantly reduce Russia’s dependency on the US dollar. We feel that if steps to initiate this decision are undertaken, it could instigate other economies of the world to engage in de-dollarization. We believe that with China already making the first moves to increase the role of the Yuan in the global market, an announcement of a gold-backed Yuan could come sooner than later and Russian could follow.

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