Russia Plans to “De-Dollarize” its Economy by 2024 Using Export Credits, Tax Incentives

The Russian Finance Ministry has announced plans to wean the country off US dollar dependence. It is expected to be a five year process, and not without some pain along the way. According to the plan published this week, Russia seeks to de-dollarize the economy by 2024. The program to do so is complex; it is tax and exports driven, with the key driver being that Russian exporters using rubles instead of dollars will obtain significant tax benefits. These include faster VAT refunds and other tax based stimulus to ditch the US dollar.

Andrey Perekalsky of Finist comments on the plan: “It is necessary to gradually switch to such a system of international payments, which implies payment in rubles for Russia’s best and most popular goods on the world market like oil, gas and arms exclusively.” Russia should also unite with China and the European Union in creating a payment channel that can’t be controlled by the United States. The alternative to the SWIFT inter-bank settlement network that could bypass Iranian sanctions could be seen as a first step in that direction, Perelsky notes. In fact, that has already been happening. The European Union, in a rare moment of solidarity with Moscow, has set up specific financial channels to allow EU companies to trade with Iran despite US sanctions for doing so.

Petr Pushkarev, chief analyst at TeleTrade, says that Russia has about US$500 billion in foreign reserves, and can keep the ruble stable despite US sanctions pressure. The current period of high oil prices could also help Russia’s economy. However, Russia should diversify not only into rubles, but also use the Chinese yuan, Vietnamese dong, Indian rupee, and even the euro, analysts say.

“The euro shouldn’t be feared. The dollar is pretty much overvalued against the euro; the IMF forecasts a gradual devaluation of the dollar by 10-15 percent,” Pushkarev said. “American policy is disliked not only in Russia. EU officials have already openly announced that they are starting to create their own system of settlements with Iran, in which transactions will not be transparent to the US authorities and therefore will not be subject to sanctions,” he added.

Using the European currency has its drawbacks, too, says Eldiyar Muratov, President at Singapore Castle Family Office. “In September, the ECB deposit rate remained at the level of -0.4 percent. In other words, if you want to keep your money in euros – you pay for it. Accordingly, Russian exporters will have to make discounts to consumers in order to persuade them to switch to calculations in euros,” he said.

Volatility of the Russian ruble is another difficulty for Russian authorities in their attempt to de-dollarize the economy. The Russian currency has a free-floating exchange rate and in the last 12 months its exchange rate varied from 56 to 71 against the dollar, which is seen as uphelpful in predicting trade flows. While the ruble is rising as a settlement currency, the central bank has to prevent the volatility, which undermines its role in international trade operations. The regulator should look at the positive experience of China.

To solve this problem, Russia should develop its financial markets, warns Ivan Kapustiansky, leading analyst at Forex Optimum. “It is necessary to hedge currency risks at least with the help of options, futures, etc. A strong clearing system is also needed for payments in national currencies,” he said.

The majority of analysts commenting on the issue appear to agree that significantly reducing the percentage share of US dollar in the Russian economy will be a long, painful, and costly process. But this trend is inevitable not only for Russia, but also for the global economy as countries seek to re-leverage away of US dominance in the light of shifting global hegemony.

“Russia remains a huge export power,” says Chris Devonshire-Ellis of Dezan Shira & Associates “and is supported by natural reserves, including oil and gas reserves that are far in excess of those within the United States. What is occurring is a gradual move away from the debt based economy of the United States towards an asset based economy against real value. De-Dollarization is just the beginning of the process of realignment of the global order.”

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