The United States has been pondering economic sanctions against Russia in response to the situation in Ukraine and Crimea. The hope is that the threat of sanctions will discourage the Russian government from using military intervention in other former Soviet republics.
While these sanctions may work to pacify Moscow, they may also have the unintended consequence of forcing Russian businesses to move away from using the U.S. dollar in international trade. According to Zero Hedge, The Financial Times reported this week that “Russian companies are preparing to switch to renminbi (Chinese currency) and other Asian currencies amid fears that western sanctions may freeze them out of the U.S. dollar market.”
Andrei Kostin, chief executive at VTB, one of Russia’s largest state-run banks, was recently quoted as telling Russian president Vladimir Putin that “Expanding the use of non-dollar currencies is one of the [VTB’s] main tasks. Given the extent of our bilateral trade with China, developing the use of settlements in roubles and yuan [renminbi] is a priority on the agenda, and so we are working on it now. Since May, we have been carrying out this work.”
It is not unheard of for international companies to bypass the U.S. dollar in global trade. The Russian head of a large European bank told Zero Hedge that “There is nothing wrong with Russia trying to reduce its dependency on the dollar, actually it is an entirely reasonable thing to do.” He went on to say that Russia’s large exposure to the U.S. dollar makes it more vulnerable to market volatility. The chief executive of a Russian manufacturer confirmed to Zero Hedge that 70 percent of its revenues are from exports in U.S. dollars. So to avoid additional currency risk the company has begun to transition to settling its contracts in different currencies.
Even though diversification of currencies makes sense from a business perspective, Russia has been very public about its goal of “de-dollarization,” which is Moscow’s plan to replace the U.S. dollar as the world’s reserve currency. If Russia achieves its goal, it would be devastating to the United States’ economy and to the value of the dollar. In fact, China has even been buying up gold in order to be prepared for extreme devaluation of the dollar.
Russia is not the only country that is unhappy with United States and its influence over the International Monetary Fund (IMF) and its right to place economic sanctions. Zero Hedge believes that this could even lead other G-20 countries to bypass the U.S. dollar and start doing their own bilateral trading with China in renminbi (yuan).
If moving away from the dollar in international trade were to become a trend, then the U.S. dollar’s status as the world’s reserve currency could come into question. Even a little bit of uncertainty could lead to a devaluation of the U.S. dollar, leading investors to move out of the markets and into physical gold in order to hedge against the subsequent inflation.