August 20, 2019 No.

Director Of The Russian Ministry Of Finance's Department For External Controls Timofeev: De-Dollarization Is A Hard Path; It Is More Profitable To Pay Directly In Dollars

The Russian media outlet recently published an article, commenting on the difficulties of abandoning the dollar in international trade. The article's author, Dmitry Timofeev, director of the Russian Ministry of Finance's Department for External Controls, stated: "Almost everywhere in the world, the conversion from one national currency to another, as a rule, goes through the dollar 'foot'. The 'pioneers' cost problem creates an undesirable balance in which the dollar remains the main functional currency," he added. It is worth noting that the department for External Controls was created in the fall of 2018 and tasked with countering Western sanctions. also stressed that the wider use of national currencies is supported by the European Union and China, but moving away from the dollar will not be quick, since this will require a restructuring of the entire global financial system.

Below is the article:[1]


Neither The Ruble, Nor The RMB, Nor Even The Euro Have Such A Correspondent Dollar Account System

"A gradual transition to national currencies in trade accounting is underway, but the process is slowed down due to the global historical role of the US dollar as the most liquid currency with a highly developed system of correspondent accounts, Dmitry Timofeev, director of the Department of the Ministry of Finance for Monitoring External Restrictions, told RBK.

"The department was created in the fall of 2018, its tasks include countering Western sanctions.

"'Connectivity to the dollar banking system provides an opportunity to trade with nearly the entire world, as almost all countries have a developed system of correspondent accounts in dollars. Neither the ruble, nor [China's currency, the renminbi] RMB, nor even the euro have such a correspondent account system.' Timofeev explains.

"The wider use of national currencies is supported by the European Union, China, Russia and other countries, Timofeev said, but governments should assume a coordinating role, as commercial participants have little incentive to abandon the dollar. 'Russia cannot single-handedly switch to settlements in national currencies, this should be supported by partner countries, therefore coordination at the international level and assistance from the governments of partner countries is required,' said the Ministry of Finance official.

Trading In Pairs That Does Not Include The Dollar Is Often Performed Through The Dollar As An Intermediary Currency

"One of the problems is the foreign exchange market, for example: now the liquidity of the ruble/RMB pair is low. 'In order for liquidity to appear, Russian business must use the RMB extensively. But now the ruble/dollar pair has high liquidity, so it is often more profitable to pay directly in dollars than in RMB. The market participants first switching to RMB will incur additional costs. Therefore, they do not seek to switch, and liquidity does not appear,' says Timofeev.

"'Almost everywhere in the world, the conversion from one national currency to another, as a rule, goes through the dollar 'foot'. The 'pioneers' cost problem creates an undesirable balance in which the dollar remains the main functional currency,' he added.

"To this day, all the most liquid currency pairs include the dollar. And trading in pairs that do not include the dollar is often done through the dollar as an intermediary currency: in order to exchange currency X for currency Y, you first have to exchange X for dollars, and then exchange these dollars for Y. The European Commission indicated that in its December 2018 de-dollarization plan.

"The share of Russian accounting decreased in dollars and rose in euros.

"In the first quarter of 2019, a significant shift took place in bilateral trade settlements between Russia, China and India, as follows from recently published statistics from the Central Bank of Russia.

  • For the first time, dollar revenues for Russian exports to China fell below 50%, to 45.7% out of total exports of Russian goods and services to China.
  • By comparison, for 2018 in entirety, the dollar share in Russian exports to China amounted to 75.1%, but in quarterly terms it has been consistently reduced, from 88% almost to 54.5%.
  • In general, considering a trade with China in the first quarter of 2019 (export plus import), about 56% of accounting were made in dollars ($ 14.7 billion of the total turnover of $ 26.4 billion), as shown by RBK calculations.
  • The decrease in dollar payments was due to a sharp increase in accounting in euros (up to 21.9% compared to 7.3% for the entire last year), but also due to an increase in accounting in national currencies (rubles and RMB) to 22.5% (last year - 16.9%).

"'The Europeans are striving to enhance the international role of the euro, which coincides with the Russian interest. The euro is an obvious alternative to the dollar: the currency is reliable, liquid and globally recognized. There is a developed financial market for euro and a developed system of international correspondent accounts,' said Timofeev. According to him, Europeans already use the ruble extensively when importing to Russia (according to the Central Bank, more than 30% of payments for imports from the EU to Russia are made in rubles).

Beijing Is Hesitant To Russia's Proposal To Coordinate With China The Placement Of Russian Federal Loan Bonds (OFZ) In RMB On A Russian Platform

"Over 75% of Russian exports to India in the first quarter of 2019 were paid in rubles, compared to only 21.3% in the first quarter of the previous year.

"But Brian O'Toolee, former senior adviser at the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury's sanctions division, doubts Moscow's success in diversifying its foreign exchange trading structure. Even when the Bank of Russia reports on the [increased] share of accounting in national currencies, 'this does not mean that Russia and its trading partners can completely avoid the dollar,' he told RBK. 'Banks still have to go through the dollar link to obtain a different currency,' assures O'Toolee.

"'If India pays Russia for contracts in rubles, Indian banks servicing these transactions have to first acquire these rubles. They can only do this via the dollar,' says O'Toole.

"As for China, so far the restrictions on capital flows in this country are the barrier, Timofeev said. 'Foreigners have limited access to the domestic financial market; it is not so easy to buy domestic Chinese securities. The RMB is not a fully convertible currency and therefore cannot play a significant role in world trade,' he said.

"For quite some time, Russia has been trying to coordinate with China the placement of Russian federal loan bonds (OFZ) in RMB on a Russian platform, but Beijing has not been forthcoming.

Russia's Disconnection From SWIFT Is Periodically Raised Since Crimes' Annexation In 2014

"According to Timofeev, the widespread use of the dollar in international payments makes it possible for the US to intervene in the economic relations of third countries. 'The motivation for many countries to abandon the dollar is understandable,' he says. Last year, First Deputy Prime Minister Anton Siluanov said that Russian companies themselves are trying to move away from the dollar, because up to a third of such payments are delayed, inter alia: due to sanctions.

"The threat of US secondary sanctions against commercial banks for interacting with persons from the US SDN list still remains, but it is being addressed, Timofeev says.'It is necessary to exclude the possibility of information about banking transactions falling into the US authorities hands, which, among other things, seems to imply not using the SWIFT financial messaging system,' he recapitulates.

"The topic of a possible Russia's disconnection from SWIFT is periodically raised since 2014, following Crimea's accession [to Russia]. So far, there have been only two cases of states disconnecting from this Belgium based system. In 2012, this measure was applied to Iranian banks, in 2017 - against banks in North Korea. However, in both cases, UN sanctions were applied against the countries, and in the case of Iran, SWIFT implemented an EU decision."