The dollar’s weakening trend does not mean that there are no challenges which may prevent other currencies from strengthening. The practice of the second half of the 20th and early 21st centuries showed that the transition of foreign economic activity to national and clearing currencies requires not only political will, but also economic conditions, writes Igor Matveev.
Against the backdrop of Western sanctions, Russia’s key task became the search for alternative ways of approaching foreign economic activity, with the elimination of the linkage to the US dollar and euro, which had become quite “familiar” to most domestic economic operators.
As a protective measure, after the start of the Special Military Operation in Ukraine (SMO), on April 1, 2022, there was a mandate that all payments for pipeline gas supplies to unfriendly countries be made in Russian rubles. By May 2023, according to the Bank of Russia, the ruble already accounted for 49.8% of settlements for exports from the Russian Federation to Europe (vs. 45.1% in the currencies of unfriendly countries). The figures for Asia were 36.3% vs. 30.2%, and for Africa they were 24.2% vs. 58.9%. The total share of transactions in dollars and euros in Russia’s imports from January 2022 to May 2023 decreased from 67.3% to 35.9%.
The imperative to abandon the dollar and the euro in favour of national currencies in settlements with allies and partners is consistent with the Foreign Policy Concept of the Russian Federation approved on March 31, 2023 (clause 39.2). This includes the Middle East vector, despite the fact that before the SMO, the states of the region accounted for no more than 9% of Russian exports and 3% of imports (of which the leading Arab partners, the UAE, Egypt and Algeria, accounted for 2.4% and 0.32%). It is no coincidence that on January 18, 2023, the currencies of three Arab countries (the UAE dirham, Qatari riyal and Egyptian pound) were simultaneously included by the Bank of Russia in the list of currencies for setting the daily exchange rate against the ruble, which, according to experts, reflects an increase in turnover with such currencies.
In order to assess the prospects for the transition to new models of settlements between Russia and the Arab countries, it is necessary to characterise the challenges and opportunities, which relate to both our country and foreign partners.
It is important that the trend towards the “erosion” of the almost 80-year dominance of the US currency has become global, opening up horizons for the introduction of alternative financing schemes. The Ukrainian crisis has accelerated this process. A good example is the Chinese yuan, whose share in transactions increased from 0.63% to 3.2% in 2013–January 2022 (even before the SMO), lifting China from 13th to 4th place in the ranking of currency circulation – after the dollar, euro and British pound. The first yuan-denominated deal for the supply of liquefied natural gas to China from the UAE, which was concluded in March 2023 at the Shanghai Oil and Gas Exchange, became a milestone event.
There is a growing interest of foreign trade participants in cryptocurrencies, with the Iranians being the first in the Middle East to try to make use of their advantages. In 2018, immediately after the US withdrew from the JCPOA, the Central Bank of Iran announced the launch of a rial-based cryptocurrency, which has been used to finance exports and imports since 2019. In 2018-2022, transactions worth $8 billion were made through the Binance exchange, bypassing US sanctions.
A similar trend is observed in Russia, where on November 18, 2022 the State Duma received a bill regulating cryptocurrency mining. The same situation can be found in the Arab world. Thus, the UAE Minister of State for Foreign Trade Thani bin Ahmed Al Zeoudi announced at the World Economic Forum in Davos on January 23, 2023 his country’s intention to become a “cryptocurrency hub”.
The dollar’s weakening trend does not mean that there are no challenges which may prevent other currencies from strengthening. The practice of the second half of the 20th and early 21st centuries showed that the transition of foreign economic activity to national and clearing currencies requires not only political will, but also economic conditions. The main thing in relation to clearing (mutual offsets), when funds do not cross borders, which is indispensable for sanctions, is the balance of exports and imports.
Otherwise, the problems which arise due to the peculiarities of clearing currencies that are not hard currency cannot be avoided. It was this status of the rupees that caused complications for the USSR, which, with a one-sided peg to Indian goods, led to the formation of New Delhi’s billion-dollar debt to Moscow. Since then, the situation with the rupee has not changed, restricting the development of trade, although in 2022 India became the second largest buyer of Russian oil (after China).
According to a number of forecasts, Russia runs the risk of falling into a similar trap with the yuan. In August 2022, the yuan overtook the dollar for the first time in terms of trading volume on the Moscow Exchange. But, despite the stability of the Chinese currency, due to gold and foreign exchange reserves amounting to $3.8 trillion, and its temporary demand in the Russian Federation (in March 2023, Chinese exports to Russia grew by 136% in annual terms), the challenge remains the same problem of convertibility, which can explain the volatility of the yuan in the world ranking of currencies. From 4th place in 2022, by April 2023 it had dropped to 5th with a share of 2.29%, yielding to the Japanese yen (3.51%). Beijing’s Arab partners are aware of this challenge: after the sensational talks in 2022 on switching to payment for Saudi oil in yuan, Amin Nasser, the president of the largest oil and gas company, Saudi Aramco, admitted that such sales are still only denominated in dollars.
Moreover, the risks associated with the yuan are increasing, since its rate is set by the PRC authorities through the People’s Bank: the United States has long accused Beijing of “undervaluing” the yuan in order to give its exporters “unjustified advantages”.
Although representatives of the business circles of Syria and Iraq, in conversations with the author of the article, have repeatedly called for the launch of barter schemes for foreign economic activity with Russia, it is worth agreeing with domestic experts that levelling the minuses of currency clearing through barter in the absence of a USSR-style state monopoly on foreign trade in the Russian Federation seems unlikely.
The Russian ruble has disadvantages of inconvertibility similar to the rupee and yuan, which, unfortunately, are increasing against the backdrop of severe Western prohibitions on financial flows: from shutting off domestic banks from SWIFT to threats of secondary sanctions. This factor hinders the development of Russia’s foreign trade, but also stimulates the search for “antidotes” using, among other things, blockchain technology.
Here, the Russian side is acting in unison with the Arabs; for example, in the issue of a national digital currency, the issuer of which, unlike cryptocurrency, is the state. This year, the introduction of the digital ruble is planned (on July 11, the State Duma adopted the third reading of the relevant law, which will come into force on August 1, 2023). The Arab monarchies led by Saudi Arabia and the United Arab Emirates are following a similar path (the Aber, Bridge, and Digital Dirham projects).
The disadvantages of the ruble as a non-hard currency are offset by its use in mutual settlements in the EAEU. Thus, in 2021, the share of relevant payments, mainly with the participation of Russia, reached 71.3% although dollars still dominated in the structure of transactions not involving Russia. Grounds for optimism are provided by the launch of promising payment mechanisms.
In 2022, ArCa payment system cards were issued in Armenia which work with Russia’s MIR payment system, which, in turn, was docked with the Belarusian Belkart system; the integration of the Kyrgyz Elkart system with ArCa, Belkart and MIR has been completed. This increases the attractiveness of the EAEU for the Arab states in the light of their common interest in the geopolitical space of Eurasia. Since 2019, five rounds of negotiations have taken place between Egypt and the EAEU on the conclusion of an agreement on a free trade zone – following the example of the document with Serbia, which entered into force in 2021. Work continues on the EAEU-UAE free trade agreement, which the Russian Ministry of Economic Development proposes to supplement with a bilateral agreement on trade in services and investment.
It is not easy, but promising, to view Russian-Arab trade from the standpoint of the SCO. Amongst the Eurasian organisations, it is the SCO that is of the greatest interest to the Arabs, especially the GCC countries (except Oman) – thanks to the participation of the new centres of the multipolar world (India, China and Russia). Since September 2022, Egypt and Qatar have been SCO dialogue partner countries; Saudi Arabia joined them in March 2023, followed by Kuwait and the United Arab Emirates in May. Bahrain is next. Iraq, Syria and Algeria have applied for participation in the SCO as observers.
Despite the presence of political will, the mosaic of interests of the SCO members does not yet allow for the creation of a joint platform for financing foreign economic activity. Kazakhstan’s President Tokayev publicly admitted at the SCO summit in India on July 4: “For more than 20 years, not a single major economic project has been implemented under the auspices of the SCO.” In this regard, partnership with the capital-abundant countries of the GCC would make it possible to realize the idea of the head of Kazakhstan to create an SCO fund to stimulate investment, which was supported in principle in Moscow.
Due to the divergence of interests among the BRICS countries, it has not been possible to implement a project to issue a common currency similar to the euro. But the potential for cooperation in the financial sector has accumulated, and is considerable, which, as in the case of the SCO and the EAEU, attracts the attention of the Arabs (applications for joining the BRICS have been submitted by Algeria, Egypt, Bahrain, Saudi Arabia and the United Arab Emirates). In particular, we are talking about the creation of an integrated digital payment system (BRICS Pay), which allows transactions to be made without the necessity of converting national currencies into dollars; currently funds in national currencies make up only 22% of the capital of the New Development Bank established in 2014 by BRICS. Since 2019, the possibility of using the BRICS transnational digital currency has been discussed.
What measures could help solve the problems of establishing foreign trade with the Arab world amid the current difficult situation facing Russia? Among them, we highlight the following.
1. The use of the national currencies of the Arab countries, which are advantageous in terms of their characteristics, as a means of payment in bilateral trade between Russia and foreign countries. For example, using the UAE dirham in Russian-Indian trade to avoid the “imbalance trap” between exports and imports. From April 4 this year, trading in futures using the UAE dirham-Russian ruble and Indian rupee-Russian ruble currency pairs began on the Moscow Exchange.
2. Choosing the optimal national currencies of non-Arab countries to ensure transactions with Arab countries such as Syria. The issue of using the yuan was discussed in Damascus on April 29, 2023, at a meeting between President Bashar al-Assad and the representative of the Chinese government for the Middle East, Zhai Jun.
3. Promotion of digital currency projects with Arab countries with the technical assistance of Russia (similar to the Russian-Iranian agreement of 2018).
4. Encouraging Arab participation in multilateral financial, economic and investment projects in the BRICS, EAEU and SCO.
5. Connecting Arab companies and banks to national projects in the Russian Federation, for example, the Financial Messaging System of the Bank of Russia which has been operating since 2014 as an alternative to SWIFT. Currently 469 companies and banks from Russia and 12 foreign countries participate in it.