By Vladimir Kolychev, VTB Capital
Russian President Vladimir Putin announced this month that Russia should aim to sell its oil and gas for roubles globally, because “the dollar monopoly in energy trade was damaging Russia’s economy”.
This was the clearest indication yet that Russia is serious about its plan to shift away fr om using the US dollar. Western sanctions against Russia have accelerated this process and encouraged Russia’s close economic alliance with China. Some may question this move but for Russia, a shift away from the dollar makes perfect sense.
Putin has been in favour of this measure for some time now, stating in 2009 that “the one reserve currency has become a danger to the world economy”. In using national currencies, Russia sees this as a serious mechanism for curbing risks. Furthermore, using the rouble will help to create strong national companies that can produce competitive goods.
In August, the Russian and Chinese central banks agreed on a draft currency swap agreement, which will permit them to increase trade in domestic currencies and lim it the dependence on the US dollar in bilateral payments.
The main factor pushing Russia away from the US dollar is the Western sanctions against it. These have jolted the country to pivot toward the East and nurture its ties with China, which has officially become the biggest economy in the world, surpassing the United States in terms of GDP at purchasing power parity. With Russia boldly aiming to secure stronger economic ties with Asian countries, as well as Latin America, using the dollar for trade simply no longer makes economic sense.
The long-term shift in the centre of economic of gravity has moved from west to east. Emerging markets are the growth economies of the world and the BRICs (Brazil, Russia, India and China) are leading this charge. The most recent World Economic Outlook report by the International Monetary Fund (IMF) found that the seven largest emerging markets are now bigger, in gross domestic product terms (in purchasing power parity terms), than the combined GDP (ppp terms) of Canada, France, Germany, Italy, Japan, the UK and the US.
During the last BRICS Summit in July 2014, the group agreed on a New Development Bank (NDB) as an alternative to the World Bank and the IMF. This will enable less dependence on Western institutions, leading to increased trade flow between these emerging markets. The NDB will almost certainly use the renminbi, rather than the dollar, as the currency to disburse development funding. While the renminbi is unlikely to become the new global reserve currency in the immediate future, the wheels are certainly in motion.
With other BRICS on its side, Russia’s decision to shift away from the US dollar will not leave it isolated. In fact, it will cement Russia and China as close allies and help maintain co-operation with Latin America and Asia-Pacific countries. More importantly, it will allow Russia to sign new deals with these emerging markets, despite any current or potential Western sanctions.
VTB Capital has mirrored Russia’s pivot to the east by signing a number of major deals recently. We managed our first Asian High Yield deal with the debut $300m five year bond for leading Chinese property developer Logan Property in which we acted as joint global coordinator, joint book runner and joint lead manager. VTB Capital also acted as joint bookrunner and joint lead manager in the Rmb1bn three year bond for Beijing Capital which was the first offshore renminbi bond led by VTB Capital for a Chinese issuer.
As such, Russia’s shift away from the US dollar not only opens doors to new opportunities, but also safeguards against potential Western sanctions against Russia. Geopolitical tensions have brought about both restrictions on access to western capital, but trading in national currency enables VTB Capital to attract capital from Asia and other parts of the non-Western world. Closer business ties between Russia and the emerging markets bodes well for VTB Capital operations in many regions of the world. A shift away from the dollar is a step that facilitates new and growing opportunities.
Vladimir Kolychev is Chief Economist for Russia at VTB Capital