On June 13, Russian Finance Minister Anton Siluanov had a meeting with Maroš Sefčovič, Vice-President of the European Commission for the Energy Union, following which a decision was made to set up an expert group for drafting a plan of expanding the use of the euro and the ruble in mutual trade settlements.
This decision is attributed to the current political situation and the threat of the further escalation of the US sanctions, including a possible freeze on dollar settlements between Russia and the EU by the US. Conditions for that are in place. The current system of international payments is based on the principle whereby non-cash payments in the national currency of a country are carried out by that country’s resident banks and solely through their accounts. In other words, the circulating dollars, other than a small portion of cash, remain and function within the US banking system, which theoretically enables the United States to freeze other countries’ dollar reserves and, in particular, to block dollar settlements of Russian companies with their European partners. Since dollar settlements are mostly used in the sale of Russian energy commodities on the European markets, such sanctions may result in a considerable reduction in the supply of these commodities, which will have a negative impact both for Russia and the EU.
Switching over to ruble and euro settlements would be an adequate response to this threat because it will render such US measures ineffective. At the same time it will contribute to further weakening of the US dollar as the world’s dominant currency.
In recent years the dollar has been gradually losing the world dominance that gives the United States one-sided economic advantages to the detriment of other economies. It provides grounds for many countries to seek to limit the power of the US currency by changing over to settlements in other currencies. As a result, the need for dollar reserves is being reduced. Thus, the US currency share in the official global currency reserves shrank from 68.5 percent to 61.7 percent between 2004 and 2018. This reduction was caused by the growing strength of the British pound, Japanese yen, Swiss franc, Australian and Canadian dollars, Chinese yuan and a number of other so-called non-traditional currencies, including the Russian ruble.
If the plan to adopt national currency settlements between Russia and the EU succeeds, the dollar space in global trade will undoubtedly be curtailed even more. The question is how strong the impact will be. We believe the reduction is going to be noticeable, although not considerable. Currently, the Russian-EU trade accounts for about 2 percent of global trade. Given that the US dollar is used in about half of transactions, removing it from the Russian-EU relations would diminish the importance of the US dollar by not more than 1 percent. However, since the dollar just cannot be ousted completely, its practical decrease in our estimate will most probably make up about 0.7 percent. The dollar component in the international currency reserves will correspondingly become slightly lower.
The United States will certainly take a negative stance on such developments and not only because they are to weaken the effect of possible accounts freezing but also because they will lead to the further slide of the dollar to the category of ordinary currencies and to the future loss of advantages that secure the US dollar dominance in the world economy.
From the formal/legal point of view the United States cannot obstruct the EU’s transition to euro and ruble settlements with Russia. Pursuant to the 1976 Jamaica Accords adopted on the US initiative, countries are entitled to choose the currency for their import and export payments. Nevertheless, as the plan moves towards its implementation we anticipate escalating US political pressure on the European establishment with a view to coercing it to adopt a sanctions policy towards Russia that would be more closely coordinated with the United States.
It would be wrong to expect that a switchover to settlements in euros and rubles will dramatically intensify cooperation between Russia and the EU and boost their trade. It was not the dollar but the sanctions war launched by the West against Russia that prevented such cooperation. Meanwhile the switchover will revive the trade and investment interaction of Russian and European companies to some extent because it will remove the risks of blocking mutual trade using the US currency.