The headline of this news piece greatly overstates the extent of any deal between Russia and China to stop using dollars. It seems to be a bilateral trading agreement. But it is credible since Russia and China have mutual trading interests that do not involve dollars; Russia is rich in resources and China is strong in manufacturing. Choosing to trade in the rouble makes sense, especially as China remains under currency controls.
It would be even more interesting if they chose some neutral currency such as the euro or even gold and silver since that would invite other countries to join in more readily, especially in the mideast and AsiaPac. We recall that both Russia and China have significant supplies of each of the metals. They might even fix a ratio of value between them, perhaps 16:1? There seems to be an historical precedent.
The problem becomes what should the value of any external standard be to the dollar? In the case of gold and silver, their prices are obviously far too low if they were to assume their roles as international trading currencies again. And the adjustment might prove painful for the three or four western banks that have been dominated the prices of several commodities, including the precious metals, at least on paper. It would be almost as if they had tied a noose around their necks and sold it to their rivals. But they would likely be made whole in cash dollar settlements.
Russia and China are not renouncing dollars overall. But watch for this to become a trend as the US continues to prove that it is no longer capable of managing the world's reserve currency on its own.
The month of November following an October dislocation in the financial markets such as we have just experienced has often proven to be filled with interesting developments.
Global Research
China, Russia, Belarus Renounce the US Dollar?
by Anatoly Gorev
RIA Novosti - 2008-10-30
The recent meeting between Russian Prime Minister Vladimir Putin and his Chinese counterpart, Wen Jiabao, created a financial sensation. Wen said that the two nations could withstand the global financial crisis if they joined forces; Putin urged him to go farther and stop using U.S. dollars in Russian-Chinese settlements.
This idea is nothing new. Russia and China reached a "framework" agreement in November 2007, which was followed by China's similar agreement with Belarus.
Earlier this year, Iranian President Mahmoud Ahmadinejad and Venezuelan leader Hugo Chavez turned against the dollar as well when they asked their OPEC partners to stop using the dollar for oil settlements. They argued that the "green" currency was no longer reliable and it was high time they look for a more stable and predictable alternative. (No one has followed them yet it should be noted, and the dollar has strengthened remarkably - Jesse)
Curiously, unlike the Ahmadinejad and Chavez appeal, Putin's proposal came as the dollar was on the rebound and even began pushing the euro. Economists even started talking in terms of a reversal of the global currency trends, rather than the temporary appreciation of the dollar.
Analysts predict that the dollar will regain its value in the next few months. They do not see anything which could hinder its steady growth.
Yet, Putin proposed that Russia and China stop using it as a settlement instrument. What is it - lack of confidence in the dollar's prospects or a political move? (The dollar has proven to be unstable, and the US preoccupied with its own internal troubles. The dollar is not a substitute for an external standard - Jesse)
Experts differ on this count. Igor Nikolayev, chief strategic analyst at FBK private auditing firm, sounded skeptical: "I think it was a political statement rather than an economic decision. There is a dominant public sentiment that the United States is the source of all evil, so let's stop using the dollar," he explained. (It was political, but it is also a warning and a preface to the November 15 meeting in Washington - Jesse)
One has to bear in mind, though, that some other currency will need to be found to replace the dollar for international settlements. China is unlikely to use the ruble, and Russia would be equally reluctant to accept the yuan. (The rouble would be more viable if it was backed by gold - Jesse)
"They could opt for the euro, but its future is uncertain, especially considering current developments on global financial markets. It is also unclear whether China would be happy to start using the euro while most of its international reserves are held in dollars," he added. (The euro has the same drawbacks as the dollar; it is too vulnerable to domestic policy priorities - Jesse)
There are more questions than answers here, Nikolayev concluded.
To be objective, one has to admit that other analysts are not as skeptical about the possibility of using other currency units between Russian and Chinese companies. (The use of gold and silver between these two countries seems logical if the trade can be 'balanced.' - Jesse)
Andrei Marinchenko, director general of the Kalita-Finance company, said the idea was quite realistic. Moreover, he thinks that the ruble stands a good chance of being selected as a reserve currency, primarily because the Chinese are disappointed in the dollar but aren't yet accustomed to the euro. (Yes but the rouble has a limited reach among other countries that do not wish to trade one empire for another - Jesse)
Only time will show who is right. But to stop using the dollar in Russian-Chinese settlements is too important a decision to make for purely political reasons - that much is obvious. (We're shocked it lasted as long as it did. It makes absolutely no sense to cede that much power to someone whose interests are not aligned with your own - Jesse)
Suppose we do it; what will be the implications for Russian businesses, how will the new financial and political reality affect their incomes and savings?
Marinchenko is convinced of a beneficial impact. According to Marinchenko, once the ruble is recognized as a settlement unit, it will enjoy growing demand with Chinese companies and individuals. The Russian currency will consequently grow stronger and more influential globally. (Its nice to dream, but there is an obvious flaw that needs to be resolved as we noted. Russia is no more stable nor trustworthy than the US for certain Physical gold and silver are beyond the control of a single country. - Jesse)
Russia will also become immune to many shocks from stock market meltdowns and won't have to fear future devaluation or revaluation of the ruble. It will happen because the role of the U.S. dollar, which has earned a reputation as an unstable and unreliable currency lately, will be much less important. (They are not able to do that now for certain. This highlights the risks of a single currency as the world's reserve currency. It is amazing that it has held together for as long as it has. - Jesse)
