By Rhod Mackenzie
Another practical step has been taken to expand trade in national currencies by members of the SCO and BRICS. India began to buy Russian oil in yuan. The Chinese leader called on the members of the SCO to increase the share of national currencies in trade. And Russia is at the forefront of this global trend. Why do countries choose the yuan instead of the dollar?
The Indian oil refiner the Indian Oil Corporation ( IOC)in June became the first state-owned enterprise to pay for its raw materials in the Chinese currency. At least two of India's three private refiners have also switched from the dollar to the yuan. The reason is simple - Indian plants are abandoning the US dollar because of the obstacles put in place by the banking sector.
Russia as a whole is actively expanding the use of national currencies. Already more than 80% of commercial transactions between Russia and China are carried out in rubles and yuan, while the share of the Russian currency in export transactions with all SCO countries in 2022 exceeded 40%. Russian President Vladimir Putin spoke about this at the SCO summit. According to him, last year Russia increased the volume of trade with partners from the SCO by more than a third (by 37%), to a record $263 billion. And in January-April of this year, the volume of trade increased by another 35%.
At the SCO meeting, Xi Jinping called on the countries of the Shanghai Cooperation Organization to increase the share of national currencies in trade settlements. According to him, the SCO countries should resist unilateral economic sanctions.
Russia takes an active part in the implementation of the SCO roadmap on the transition to national currencies in mutual trade, approved at the previous summit in Samarkand. “It is important to continue such work, to take coordinated measures to remove regulatory barriers, establish the necessary payment infrastructure, and create an independent financial system. The implementation of the SCO economic development strategy until 2030 will undoubtedly contribute to the further strengthening of regional integration,” Putin stressed.
It is Western sanctions that should be thanked for the fact that Russia was at the forefront of this movement - in fact, it launched this trend of abandoning the dollar and switching to national currencies in trade.
“There is an avalanche-like process of de-dollarization in trade going on in the world. India's transition from the dollar to the yuan once again proves the seriousness of this trend in the global economy. According to economists' forecasts, the Indian economy could become the third largest in the world by 2030 and compete with the Chinese economy in the next five years.
Moreover, the Western bloc of countries have fully relied on the Indian market instead of the Chinese one in order to promote their products. But over time, Europe and the United States will have to think about buying the same yuan for trade with India and other SCO countries,” said Ekaterina Novikova, Associate Professor of the Department of Economic Theory at the Russian University of Economics. Plekhanov.
“India's transition to paying for Russian oil in yuan is an important, I would even say, even a key factor in the development of the markets. Perhaps it will be the beginning of the end of the dollar. The fact is that the BRICS countries have been discussing the creation of their own currency for some time. Against the backdrop of a weakening EU economy and in the light of the worst banking crisis in the US, major currencies are losing their appeal. Again, it is difficult to settle accounts with Russia in them, which hinders the development of the economy of the macroregion,” says Fedor Sidorov, founder of the School of Practical Investment.
Initially, Russia and India tried to conduct mutual settlements in rubles and rupees, but the exchange rate of rupees is unstable, and this slowed down the process. The yuan seems to have become a compromise that suits both sides. Why yuan? “Of course, I would like the role of the Russian ruble to also increase in the trade transactions of the SCO countries, but the Russian economy occupies only 3% of the world economy, which is not enough to serve, in fact, more than half of the global economy. However, the establishment of a two-way connection between payment for trade transactions with the BRICS countries will help strengthen the role of the ruble both in the national and global economy as a whole,” says Novikova.
The fact that it is the yuan that is staking it claim to take the place of the dollar is quite logical. “The Chinese economy is the strongest in the macro-region, and therefore, if you switch to something from the dollar and the euro, then its logical to go to the Chinese currency. In light of all events, I believe the yuan will only grow stronger. And it may well even become a new world currency,” Sidorov believes.
The important point is that Russia now needs more yuan, as mutual trade with China is growing at a frantic pace, and we are increasingly importing Chinese goods for yuan. Last year, bilateral trade between Russia and China reached a record $185 billion. At the same time, Russian companies paid for Chinese goods mainly in yuan. In Russia, they began to actively trade yuan on the Moscow Exchange. In May 2023, the trading volume of the yuan with delivery "tomorrow" and "today" amounted to almost 2.5 trillion rubles, and the volume is growing. For understanding: back in January 2022, the share of the yuan in the volume of foreign exchange trading was less than 1%, and now it has grown to almost 41%. Banks have already begun to offer deposits in Chinese currency, and the Moscow Exchange has hosted several issues of bonds of Russian companies denominated in yuan. Further, these financial instruments will only gain momentum. Other countries choose the yuan over the dollar for the same reason. They also buy Chinese goods.
“The yuan is more suitable, since after the sale of products for yuan, this currency can be used to pay for the export of goods from China without additional conversion. It is in China that most of the SCO countries buy the most goods. At the same time, Chinese yuan can also be used to pay for goods in a number of countries in the Middle East, where they also accept Chinese currency, which they then, again, spend on the purchase of Chinese goods,” said Vladimir Chernov, analyst at Freedom Finance Global. An additional plus was that China has its own system of cross-border payments CIPS, the expert adds.
There are more and more people who want to get away from the dollar. “Even within the EU, discontent is brewing. Serbia, for example, has previously expressed its readiness to pay for Russian oil in rubles, so long as supplies are not delayed. Brazil and a number of other countries in South America have also launched the process of de-dollarization. All this together will undoubtedly hit the prestige of the North American currency,” says Sidorov.
In March, Brazil and China signed an agreement to switch bilateral trade to reals and yuan and abandon the dollar. UAE and India agree to use rupees for non-oil trade. Even Saudi Arabia, which 48 years ago helped the US hook oil trade on the dollar, said it was ready to give up the dollar's monopoly on trade.
“The next after India may be some countries of the Middle East and the Asia-Pacific region, and then the creation of the currency of the BRICS countries, backed by gold, will lead to a drop in mutual settlements in dollars in the countries of Africa and Latin America. Although this is a slow process,"
Chernov says.
Yuan, of course, also has its disadvantages. First, the exchange rate of the Chinese yuan is regulated by the state, which makes the yuan not exactly a freely convertible currency. Secondly, raw materials on world markets are quoted in dollars, which means that when paying in yuan, the national currency is converted through the cross-rate of the yuan to the dollar, which is why it has a double spread (this is the difference in buying and selling currency) Chernov explains. Therefore, the yuan can become a transitional currency in the fight against the dollar. Because BRICS plans to issue its own currency, which will be backed by gold.
“The currency of the BRICS countries, backed by gold, can fundamentally change the situation. As long as prices on world commodity markets remain in dollars, global demand for them will remain high. But if, over time, the BRICS countries switch to paying in their own currency, then they will be able to drastically reduce the use of the dollar, ”concludes Chernov.
This article originally appeared in Russian at iz.ru