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).

However, if Russia agrees to let other countries import its goods in their own currencies, then imports no longer become monetary factors. Instead, they become purely fiscal, thereby affecting only the buyer and seller and not removing foreign currency from the importing state. However, the exporter – i.e. Russia – will accumulate the currency of its buyer, thereby restricting it to the markets where that currency works. In effect, the trade – while conducted in currency – actually becomes more of a countertrade or barter.

This is the reality of accepting a currency of less utility than the USD, Euro or GBP. Currently, countries will prefer USD because it is universally accepted and, just as importantly, enables those states to buy goods from the US (e.g. technology, energy and armaments). Furthermore, when trade is done using the buyer’s currency, not only is Russia accumulating that currency, but it places Russia within the market constraints of the buying country. For example, with PKR at its disposal, Russia becomes another domestic economic player within Pakistan; it stands to lose and gain as much as any other large fiscal player in the country.

For example, in 2018 Russia might be interested in the PKR because of its ability to access a certain kind of gran at $X. In 2019 that specific grain product might see increased global demand, which would increase the price of that certain grain by $1 (assuming the supply is not expanded), leaving Russia with X+$1 (i.e. addition of $1). Moscow might not prefer that to happen, thus providing it incentive to induce an element of pressure on the Pakistani government to manipulate the market (e.g. taxes on exports).

Moreover, Moscow is unlikely to open this trade in local currency to countries that do not offer the right goods or, at the bare minimum, fail to show the promise of eventually developing those goods. It is worse for countries whose currencies are limited (in usage) to themselves and not other (ideally, multiple) states. On this basis, the GBP and Euro would have more utility than most other currencies because there are more markets accepting them for trade. Barter in certain commodities (e.g. gold, silver, fossil fuels or agricultural goods) might be of more value to Russia than certain currencies.

To understand what markets might be of interest to Russia (to justify accumulating that foreign currency) one must look at Russia’s primary imports. Currently, it stands to reason that Russia is spending its foreign currency reserves to supply its market with these goods. In 2016, Russia imported $180 billion US in goods, with manufactured goods (not including chemical) of various kinds being its leading spend at 42%, with automobiles, auto-parts and consumer electronics at the forefront.[5] In terms of goods associated with the developing world, Russia’s textile and agricultural imports (i.e. vegetables and foodstuffs) stand at 5.8% and 9.6%, respectively.[6] Chemical products and plastics/rubbers accounted for 13% and 5.5% of imports.[7]