Russia, China Sign Deal To Settle All Trade In Respective Currencies And Drop Bilateral Use Of US Dollars

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First significant withdrawal of USD from international trade

Russia’s Finance Minister Anton Siluanov and Chinese People’s Bank Governor Yi Gang have signed off a deal that will see the two countries ditch the US dollar in international settlements between them and revert to using their own currencies. With Russian-China bilateral trade running at about US$25 billion a quarter, this is the first significant move to walk away from US dollar trade settlements and develop alternative payment systems.

The motivation has been two-fold; the increasing use of the US dollar as a weapon by the United States to manipulate the strength or weakness of other currencies in accordance in Washington’s political agenda, and to develop China’s desire to expand the use of the RMB Yuan as a global currency.

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Anatoly Aksakov, Chairman of the Russian lower house’s Financial Markets Committee, said that Moscow and Beijing were already developing new mechanisms for payments in Russia’s ruble and China’s RMB yuan. This means alternative systems to SWIFT, via which much of the worlds global transfers are conducted. The SWIFT network, although is based in Belgium, is effectively controlled by Washington. Countries that are placed under US sanctions, such as Iran was after the US pulled out of the Nuclear deal framework of 2015, can have their entire global money supplies terminated by switching the country off the network. That had an immediate impact on the Iran rial, which nosedived in value, inflation, which is running at 40%, has left it unable to receive payments for oil and has left Iran having to make domestic payments and transactions for essentials using its gold reserves. The local economy has slumped, which is why President Donald Trumps has made recent comments that “the Iranian economy is collapsing”.

Russia is already under sanctions, and China has been spooked by the recent threats of tariff impositions (a type of sanction) and future implications should additional political problems emerge between it and the United States.

The two sides may settle payment gateways between their domestic alternatives to the traditional SWIFT system, Russia’s System for Transfer of Financial Messages (SPFS) and China’s Cross-Border Inter-Bank Payments System (CIPS).

The two countries will have to develop ruble and yuan financial instruments to boost cross-currency trade and mitigate risks of exchange rate fluctuations, according to Aksakov. He added that in the coming years, the share of settlements in national currencies between Russia and China could increase from 10 to 50 percent.

The mechanism of payments in national currencies is set to be implemented next year. At first, major companies with state participation from sectors such as energy and agriculture will switch to the joint system. The yuan-ruble payments will also be made on existing contracts which stipulate settlement in dollars.

It is not inconceivable that Russia and China will later expand these networks to offer an alternative trading system to and with other trading partners.

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Russia Briefing is produced by Dezan Shira & Associates. The firm advises international businesses on investing, setting up businesses and administering them throughout the Eurasian region, including Russia, China, India & ASEAN, and maintains offices and partners in each of these countries and regions. For assistance with investing in Russia, or for Russian businesses wishing to invest in Asia, please contact Maria Kotova at maria.kotova@dezshira.com or visit us at www.dezshira.com.

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