President Vladimir Putin’s government says it is working on plans to de-dollarise Russia’s $1.6tn economy and wean its biggest industries off the US currency, following four years of US sanctions against the country and its expectation of new restrictions.
The US Senate is considering proposals, aimed at penalising Russia for alleged US election interference and international aggression, that would in essence cut off Russia’s biggest banks from the dollar and deny Moscow access to foreign debt markets.
US sanctions have in effect have barred Russia’s defence industry and some of its largest corporate groups from using the greenback, and have dramatically reduced the ability of the country’s big oil and gas players to borrow in dollars.
A plan by Andrei Kostin, the head of Russian bank VTB, for banks and companies to convert dollar settlements into other currencies, has the backing of the finance ministry, central bank, and — Mr Kostin said this week— Mr Putin.
In addition, the Kremlin has sought to strike deals with major trading partners to use the Russian rouble for imports and exports.
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That push has been welcomed in countries such as China and Turkey where relations with the US are similarly strained.
“More and more countries, not only in the east but also in Europe, are beginning to think about how to minimise dependence on the US dollar,” said Dmitry Peskov, Mr Putin’s spokesperson. “And they suddenly realise that a) it is possible, b) it needs to be done and c) you can save yourself if you do it sooner.”
But rhetoric may be easier than reality. Russia relies heavily on exports of commodities and energy — markets where the dollar is overwhelmingly the currency of choice. And the Kremlin is unlikely to convince its western partners to trade in the volatile Russian currency.
Analysts are divided over just how painful four years of sanctions have been for Russia’s economy, but the impact on its currency and bond markets has been significant.
After the US Treasury announced its strongest-ever measures in April — which cut off major businesses, including the country’s aluminium industry, from the dollar and from doing business with US citizens — the rouble fell as much as 18 per cent against the US currency.
Threats from Washington to extend similar curbs to the country’s state-run banks and to ban purchases of Russian sovereign debt have also sparked a $7.5bn sell-off by foreigners of the country’s bonds, known as OFZs.
Russia is a major exporter, with a trade surplus of $115bn last year. Its metals, grain, oil and gas are consumed around the world, and remain in high demand in the west, despite the souring of relations between Moscow and many western capitals.
Increased trade with China and other Asian partners in recent years has helped reduce the overall contribution of the dollar to its currency settlements, but the greenback still accounted for 68 per cent of inflow settlements last year.
“I support the direction of increasing payments in the national currency, certainly,” said Elvira Nabiullina, Russia’s central bank chief. “It should continue according to economic expediency and taking into account the interests of our exporting companies, but nevertheless the direction of travel is promising.”
From 68 per cent of Russia’s total external debt in December 2015, to 53 per cent in March of this year, the push to de-dollarise Russia’s obligations has been a modest success.
Though the Russian central bank has increased its dollar debt exposure — that’s the exception. The government has managed to bring its exposure down to just 31 per cent, from three-quarters in 2011.
Most importantly, Russia’s banks and companies — which are most likely to be hit by new sanctions — have been able to shift chunks of their debt from dollars into roubles.
But the exposure is still more than 55 per cent across the corporate sector.
As Rusal, the world’s largest aluminium producer outside of China, found in April after it was sanctioned by the US, the inability to pay off dollar-denominated debt is a sure-fire way to scare off investors.
At a major joint military exercise in Vladivostok last month, Mr Putin and Chinese leader Xi Jinping vowed to stand together and fight against US policies such as sanctions against Moscow and tariffs against Beijing.
Turning those platitudes into real-world benefits will be crucial to Moscow’s de-dollarisation efforts. In recent years, increased trade with China has offset falling trade with the EU, and Mr Putin and Mr Xi say they want to increase the use of Russian and Chinese currencies for cross-border trade.
Turkey, too, has said it is open to trading in local currencies with Russia. But trade with Ankara is far less significant than with major western partners, and the mechanics of paying for goods in lira or roubles are yet to be developed. And given Turkey’s own financial troubles, the country has less space and inclination for largesse than Moscow might have hoped for.
“De-dollarisation is possible to a certain extent, but it is not a question of whether you want to leave the dollar territory, but where are you going to go after that? Euro? Yuan? Bitcoin? What is the model of this next system?,” said Konstantin Korishchenko, a former deputy chairman of the Russian Central Bank.
“There is no one single solution, and there could be multiple choices,” said Mr Korishchenko. “Each one has its own costs — we have to balance the costs of staying with the dollar and the costs of finding a new situation.”
Despite promises, pledges and programmes to reduce Russia’s reliance on hydrocarbons, production of oil and gas is still the backbone of the country’s economy — accounting for some 50 per cent of the federal budget.
While gas is typically sold to European countries on long-term contracts that could be priced in euros, the global oil trade is a dollar market, with major traders unlikely to accept foreign exchange risks by buying and selling in other currencies.
China, which has increased its purchases of Russian oil and gas, could be open to de-dollarising those imports — but other countries are unlikely to follow suit.
“You can’t just say: ‘OK let’s abandon the dollar and trade oil in euro’,” Mr Korishchenko said. “Libya tried and failed. Iraq tried. The dollar’s role in the oil market is not going to change quickly.”
