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Russia Considers Trading in the Currencies of its Buyers

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]

Can Pakistan Capitalize?

There will be some interest in seeing whether Pakistan could secure additional defence purchases through Russia’s local currency trade policy. However, should Pakistan gain access to other Russian goods, such as its gas and heavy machinery on this basis, then that would be a significant boon for the Pakistani economy.

In effect, Pakistani manufacturing companies can procure the systems they need to generate production (i.e. additional economic activity) without burning into Pakistan’s current account deficit. In other words, be it energy or machinery, Pakistan need not accumulate debt in order to fund the development of high-value industries in automobiles, chemicals, plastics and other manufactured goods.

Moreover, if its purchases are steered towards goods desired by Russia (e.g. auto parts), it will incentivize the Russians to take-on the PKR as it will readily enable them to buy from Pakistani suppliers. This will enable those Pakistani suppliers (that procure Russian equipment and energy) to scale through the domestic Pakistani market, the Russian market as well as others. However, because of the PKR, both the Russian market and the domestic Pakistani market will have incentive to buy from these suppliers.

The effect would be a growth in exports and a decline in imports, thus boosting Pakistan’s foreign currency reserves and, with time (and sustainment), see the value of the PKR rise. Of course, as it is the case with the US, UK and the European Union, these Pakistani suppliers would must compete with other developing world players in the Russian market (one can assume that Russia will take-on Southeast Asian and African currencies where feasible as well). Thus, domestic measures towards increasing competitiveness (e.g. the ability to increase quality and output while maintaining costs) would be required.

In terms of defence, the benefits of being able to procure arms in PKR are obvious. For Pakistan, importing big-ticket items – namely advanced combat aircraft, surface-to-air missile (SAM) systems and helicopters – need not affect its foreign currency reserves. Instead, purchases become a purely fiscal issue for as long as Moscow is willing to honour such purchases. Moscow will accumulate PKR which it can spend at will in Pakistan, though the PKR’s value depends on whether there is alignment in Pakistani supplies and Russian demand. Alternatively, if the Russians are more risk-averse, Moscow could simply compensate Pakistan’s loss of foreign currency through offsets, e.g. investing in the Pakistani economy to create new suppliers.

Be it defence, energy or other goods, Russia’s willingness to extend the domestic currency trade option to Pakistan depends on Pakistan’s ability to build confidence in Moscow. In the near-term, Pakistan stands to benefit, but it will be Russia that will hold the risk of carrying large amounts of PKR. The establishment of special economic zones (SEZ) for auto-part and electronics manufacturing was among the ‘aspirations’ of the China Pakistan Economic Corridor.[8] If Pakistan could build upon this by showcasing a plan that will see such SEZs manufacture (not just assemble) such goods using Russian machining and tooling (which would be bought in PKR), then Pakistan might have a shot at building Russian confidence.

It would be premature to guarantee a medium-term turnaround in Pakistan’s macroeconomics, but with current international trade dynamics in play (which are contrarian to the multi-lateral, USD-lead domain of only recent years), Pakistan might not have as unique and fruitful an opportunity.

[1] “”Rosoboronexport” allowed the possibility of payments for equipment in the national currency.” Interfax. 21 August 2018. URL: (Last Accessed: 11 September 2018).

[2] Ibid.

[3] Ibid.

[4] “Unnecessary dollars. American currency is being pushed out of Asia.” RIA Novosti. 06 September 2018. URL: (Last Accessed: 11 September 2018).

[5] Data. Russian Imports in 2016. Observatory of Economic Complexity (OEC). URL: (Last Accessed: 11 September 2018).

[6] Ibid.

[7] Ibid.

[8] Khurram Husain. “Exclusive: CPEC master plan revealed.” Dawn. 21 June 2017. URL: (Last Accessed: 12 September 2018).

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