Russia Considers Trading in the Currencies of its Buyers Plus

During the 2018 International Military-Technical Forum “Army 2018”, which took place in Moscow, Russia in August 2018, Russia’s commercial trade agency for defence Rosoboronexport announced that it would consider trading in the local currencies of its customers.[1] Rosoboronexport’s head, Alexander Mikheyev, stated: “We are considering the possibility of settlements in national currencies – Indian rupees, Chinese yuan, durhams, and rubles.”[2] The move is not necessarily restricted to defence, it could include the total gamut of Russia’s goods – i.e. energy, manufactures, armaments, heavy machinery, electronics and more – in order to boost market-share for those goods in key developing world markets.

Moscow has been forthright about the move’s rationale. Simply put, the goal is to enable Russian vendors to circumvent the affect of the US sanctions on the Russian government and its state-owned enterprises.[3] Currently, the majority of global trade is conducted in USD, a universally-recognized currency due to the US’ leading position in geo-political affairs and its prominence (alongside China, the UK and the European Union) in global trade. By constructing bilateral trade agreements in Russian Rubles and the currencies of its customers, Russia is aiming to undermine the USD-led trade environment.[4]

In theory, Russia’s move to distance itself from USD appears sensible as it will let Moscow guarantee the availability of markets from which it can buy low-cost commodities, consumables and – where applicable – high-value goods. However, there is a caveat: those markets that Russia will trade to (and, in turn, take on currency) must offer products and services that are sufficiently desirable to the Russian market.

This is because when two countries – or agents between two countries – trade, they alter the respective account balances of their host countries. For example, if a buyer in Pakistan imports equipment from the US, not only is that buyer spending in a fiscal sense (e.g. removing X-rupees from its bank), but it is also requiring Pakistan to sell Pakistani rupees (PKR) in order to buy dollars. This ‘currency trade’ takes place by increasing the supply of the rupee (to sustain circulation) and, in turn, decreasing the supply of USD.

The increase of the supply of PKR and decrease of the supply of USD causes the USD to increase in value relative to the PKR, i.e. devaluation of the PKR. Of course, this is only one reason for currency devaluation (there is also the impact of interest rates, available capital from banks, etc). However, buying in a foreign currency has both a fiscal and monetary impact, with the latter – if not counter-balanced by the inflow of foreign currency through exports or foreign investment – being at risk of causing an account deficit. This deficit means that the importing country is unable to guarantee the payments committed to suppliers in other states based on the agreed-upon price between the importer and exporter (i.e. agreed in USD).