After sustaining a series of very tough sanctions imposed by the US in 2017-2019, Russia has redoubled its efforts to modify the dollar-dominated international trade system. Russian expert Dmitry Migunov explained that Russia's de-dollarization plan consists of two parts: the first is to lower the dollar's share in Russia's international reserves, and the second is the transfer of the country's international trade from the dollar to other currencies, including the ruble. Although Russia has somewhat reduced its international transactions in dollars, there are several reasons why a rapid de-dollarization is not going to succeed and, in any case, it's not the ruble, but primarily the euro that is substituting for the dollar.
Alternative currencies, such as the Russian ruble, the Chinese RMB, the Turkish lira and the South African rand are subject to severe rate fluctuations that create extremely high risks of loss. Also, the transition to accounts in currency alternatives to the dollar inescapably incurs a rise in transaction costs. Furthermore, the dollar is popular not only thanks to the economic might of the US but mainly thanks to the worldwide existence of a system of dollar accounts. One doesn't have to invest any efforts in order to obtain and use it in accounts. "Therefore, to speak of the full ejection of the dollar as the basic currency of trade in Russia, or in any other country, is still premature," Migunov concluded.
Below is Migunov's article:
The Prospect Of A Full Liberation From The Dollar Dependence Apparently Will Not Come About, But Almost Certainly It Will Be Further Reduced
"The process of Russia's deliverance from dollar domination in the country's international commerce has arrived. Currently, a little more than half of all deals with important counterparts are implemented in American currency. However, it's not the national currency, but primarily the euro that is substituting for the dollar. And this is fully understandable considering the instability of non-essential currencies; states vote for reliability. The prospect of a full liberation from dollar dependence apparently will not come about, but almost certainly it will be further reduced...
"The effort to exit the dollar system of international trade in Russia has grown stronger after a series of very tough sanctions imposed by the US in 2017-2019 (the next round was announced a few days ago). The de-dollarization plan consists of two parts: the first to lower the dollar's share in Russia's international reserves, and secondly, the transfer of the country's international trade from the dollar to other currencies, including the ruble. In the summer of 2018, the head of VTB bank, Andrey Kostin, announced that with the dollar 'it is necessary to begin struggling on a global level,' and the de-dollarization should be conducted in the global economy as a whole.
"It turned out as expected, that the first part of the task was performed much more easily than the second. The central bank since 2017 has actively dumped dollars, and by the middle of 2018 the share of American currency in the foreign assets of the Russian regulator constituted about 22% or two times less than the previous year. The central bank did not incur any losses as a result, irrespective of the fact that the dollar for the last two years has strengthened in the basket of major currencies. Instead of 'greenbacks', the central bank has actively purchased yuan, euros and gold, whose inventory has already surpassed 2000 tons.
"The trade situation turned out to be much more complicated. For here is necessary to convince trade partners that it would be better for them to purchase Russian export products for some other currencies which, at the very minimum, takes time. Nevertheless, the movement has begun. As the Bloomberg agency noted the share of the dollar in the structure of Russian export earnings has fallen over a stretch of four months in succession.
"According to the Bank of Russia data, in the first quarter of 2019, export earnings in US dollars formed 61.7% of the total amount. In comparison, in the analogous period of 2017, they constituted nearly 70%. Especially noticeable is the change in trade with the EU, where the dollar share in exports – for the first time ever – fell below one half. In the first quarter of 2019, 46% of exports from Russia to the EU were sold in dollars and 42% in euros. A year ago, this correlation was 53 and 33% respectively.
"The analysts surveyed from Bloomberg suggest that at least part of the responsibility for this change lies with America itself. Numerous trade wars unleashed by the US administration over the last year and a half have provoked the Europeans to gradually start ridding themselves of dollar servitude. This way the inclinations of both contracting parties ideally coincided, which facilitated the process of changing the main trade currency.
"An even more interesting case deals with India (where the total sum of the trade turnover equals $11 billion a year). At the beginning of 2017, nearly 80% of Russians export to India was paid for in dollars. During the course of this year, the parties agreed upon payment for the supply of arms in rubles. As a result, the share of rubles in the exports jumped in April 2019 to a record 75% (Even in trade with the countries of the Eurasian Economic Union Russia's 64% ruble share is lower). For its part, the share of dollars plunged overnight to 20%.
"In such a manner, with one separate country the policy of transitioning to trade in the national currency was almost totally realized.
Essentially, The Dollar Is Everywhere
"With China, the successes were somewhat more modest. The ruble share of deals in Russian export barely rose – from 8.92 to 9.62%. For that reason, the share of the euro took off from a miserable 0.7% in the start of last year to 37.6%, according to the results from the first quarter from 2019. The dollar lost approximately half the Russian export market in China: from an 80% share in American currency, it plunged to 45%.
"As far as Russian imports are concerned, then here, no major changes occurred: payment in dollars, as earlier accounts for slightly more than a third of the deliveries; in rubles it is slightly less than one-third and in euros, around a quarter. The rest of the currencies do not have a significant presence (amounting to 4% in all).
"The significant changes in the currency structure of payments for Russian exports were caused by an entire series of circumstances, including, as the Bloomberg analysts indicate, the sanctions against Russia. Russia's international payments are restrained by the fact that Western companies – time and again –are forced to comply with the sanctions regime. It could well turn out that by participating in a deal, a specific company could find itself on one of the US Treasury's blacklists, and trade with it could lead to consequences also for the foreign party. A transition to other currencies would help avoid problems of a similar nature.
"As a whole, despite the tangible successes in the matter of de-dollarizing Russian external trade, it is not possible to speak of the full substitution of the dollar in accounts with foreign parties for the foreseeable future. Many of Russia's partners do not want to conduct accounts in national currencies due to their severe instability. This is the evaluation of analyst Sergei Drozdov of the Finam investment company. 'It is no secret to anyone, that they regard the Russian ruble, the Chinese RMB, the Turkish lira and the South African rand as currencies subject to severe rate fluctuations that under conditions of overextension, during the delivery time of goods and services, create extremely high risks of loss,' he stated in an interview to Izvestia. In recent days, we could observe the classic example of such risks, when China in one stroke devaluated the RMB to 7 to the dollar.
"Correspondingly, the transition to accounts in currency alternatives to the dollar inescapably incurs a rise in transaction costs. So, on a scale of Russia's foreign trade turnover, this leads pursuantly to appreciable losses for the country's budget.
"A similar opinion is adhered to by the head of the analytic department of the Instant Invest investment company, Alexander Timofeyev. In his words, in order to conduct payments and escort contracts, a strong diversification of the various countries' currency reserves is necessary. 'If we say that we need to raise funding in RMB and rubles, then it will prove necessary to raise international reserves in these currencies. But this is very risky,' considers Izvestia's informant.
"One should not also forget things such as infrastructure. The dollar is popular not only thanks to the economic might of the US (in the end result, its share in the global economy is now substantially lower than at the time when the dollar system had just been created) but thanks to the worldwide existence of a system of correspondent dollar accounts. Essentially, the dollar is everywhere. One doesn't have to invest any efforts in order to obtain and use it in accounts.
"The use of other currencies in that capacity demands many years of preparation. Therefore, to speak of the full ejection of the dollar as the basic currency of trade, at least in Russia, or at least in any other country is still premature."
 Iz.ru, August 6, 2019.