Russia and China have served notice that as the US continues to struggle with crippling deficits and a rapidly growing debt, the two countries intend to take a far more active role in shaping international finance. According to figures supplied by Russia, trade with China was the highest ever last year at $57 billion. This pales in comparison to the $409 billion traded between the US and China but there is little doubt that China and Russia intend to change this over the next two decades.
A goodly percentage of this growing trade will be in the form of oil which according to Russian Deputy Prime Minister Igor Sechin – who just happens to be Chairman of Russia’s largest oil company – will surpass the $100 billion mark over the next twenty years.
But this is where this gets interesting. Russia wants China to pay for this oil in rubles not US dollars as is the practice now.
Receiving payment directly in rubles would serve two strategic goals for Russia – first and foremost, it would help support the ruble which ever since Russia first opened its economy to capitalism, has struggled against the major currencies. In exchange for Russia’s oil, China would have an expanding market for its exports that – presumably – Russia could pay for in rubles or rubles converted to yuan.
Whatever the payment arrangement, there would no longer be the need for Russia to convert weak rubles to dollars in order to buy China’s products. Add to this the likelihood that China will continue to protect the yuan from significant appreciation to ensure strong markets for its exports, and you can see why eliminating the dollar from the equation appeals to both countries.
Secondly, this will reduce overall exposure to the US. Currently, Russia holds $400 billion in US debt and cash, while China has nearly $2 trillion in its foreign currency reserves. Both countries have been critical lately with respect to US economic policy hurting the value of these reserves and have even suggested that an alternative to the American buck is needed as the world’s currency of choice for foreign reserves.
What could all this mean for the US dollar? Initially, not that much. It will take several years for current contracts to be rewritten to cut out the dollar altogether and we’re still talking a relatively small amount. But it is the message this sends that really has the potential to be a game-changer. It signals that two of the world’s largest economies – despite holding nearly two and half trillion in US funds between them – intend to reduce their dependence on the dollar.
About the Author
Scott Boyd has been working in and writing about the financial industry since the early 1990s. As a technical writer and project manager with several of Canada’s leading financial institutions, Scott has produced educational materials for investment system end-users including portfolio managers and traders. Scott now administers and contributes to OANDA FXPedia and regularly provides commentaries for the OANDA FXTrade website.
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