US Dollar to Remain Key Reserve Currency in Eurasia Absent Economic Diversification

On March 29, 2018, the Valdai Discussion Club held an expert discussion on the de-dollarization of the EAEU countries’ economy, attended by Alexey Kuznetsov, senior economist of the Eurasian Development Bank, Oleg Preksin, High Commissioner of the Eurasian Economic Cooperation Organization, and Grigory Marchenko, former first vice-premier of Kazakhstan and former chairman of the country’s National Bank (via video link). The discussion was moderated by Yaroslav Lissovolik, Programme director of the Valdai Discussion Club.

The Eurasian Economic Union countries face the acute problem of dependence on the US dollar. It is obvious that in conditions of trade wars and sanctions it is necessary to get out of the “dollar quagmire,” but this can only be possible after diversification of the economy of the association’s leading countries and involvement of the powerful economic powers of Eurasia in the integration processes. Such conclusions were made by participants in the expert discussion, titled “De-Dollarization in the EAEU: Experience and Prospects”.

Yaroslav Lissovolik, the discussion moderator, noted that the EAEU countries have a favorable background for active promotion of the de-dollarization process: the economic growth and trade turnover are being restored, supported in large part by the growth in investments. The starting point of the discussion was the Valdai Paper #83 “De-Dollarization in the EAEU Member States: Key Trends and Prospects.”

Alexey Kuznetsov, the Valdai Paper co-author, briefly outlined its main findings. A high level of dollarization has been a characteristic feature of the EAEU countries for many years: in 2015-2016, if we take the share of deposits in foreign currency, its upper level exceeded 70%, and the lower one was around 41%. The reasons for this were the high level of inflation, a long period of a fixed exchange rate, and frequent periods of financial instability. Since the end of 2016, the situation began to change for the better with the share of foreign currency deposits in the total volume of broad money decreasing significantly.

The expert singled out Belarus, where the dollarization index dropped from 72% to 60%, Russia (from 42% to 27%), and Kazakhstan, the country with the largest progress (from 51% to 31%). Kuznetsov noted that these positive changes were primarily caused by the set of measures taken by these countries’ central banks and governments. These measures should continue: according to him, it is necessary to use national currencies in state borrowings more broadly, improve the macroeconomic environment, and replace external financing with domestic one. As for the EAEU countries, active mutual trade will also contribute to this.

Grigory Marchenko objected, noting that the process of dollarization/de-dollarization is not linear, but cyclical, since the economies of the EAEU leading countries – Russia and Kazakhstan –are highly dependent on oil prices’ fluctuations: with the decline in oil prices, the national currency rate falls. Therefore, the positive trend of the past 18 months is, according to the expert, just a rise in the framework of the unchanged cycle. As a measure to combat the dollar dependence, Marchenko proposed a more extensive economic integration involving countries whose economies do not depend on the raw materials prices – for example, China and India. The best option would be creation of a single economic space within the Shanghai Cooperation Organization with the possibility to use the Hong Kong dollar instead of the US dollar. The problem with the US dollar lies in the fact that any operation performed with it can be blocked by American courts, whereas Hong Kong has an independent court. “The best way to combat dollarization is to dollarize via another currency, which is based on the territory of a friendly state,” the expert formulated his paradoxical conclusion.

Oleg Preksin touched upon the issue of “digitalization” of the economy and the possibility to use various crypto-currency technologies in a single economic space. According to the expert, it is necessary to distinguish between the system of settlements and the currency used for these settlements. As for the former, blockchain can be used in this capacity, and as for the latter – a new reserve currency, which can be managed on the principle of corporate governance. Agreeing with Marchenko that the prospects to use a particular national currency for these purposes are doubtful, Preksin suggested looking at the Special Drawing Rights – a non-cash payment facility issued by the IMF. A favorable scenario for the EAEU would be the creation of an enclave on friendly territory, similar to the “ECU zone” which existed in Europe in 1979-1998. The expert named Astana as a possible center for such an enclave.

The questions asked by the discussion participants once again concerned the problem of crypto-currencies or other forms of payments, like promissory notes. Marchenko said that crypto-currencies can, of course, help fight the dollar dominance, but Special Drawing Rights and promissory notes are not suitable for this, since there are two major problems: trust between the participating countries and independent courts.

Concluding the discussion, Yaroslav Lissovolik once again stressed the need for economic diversification. “At a time of trade wars and sanctions, it is necessary to get out of the dollar quagmire,” he said. “There are enough proposals; we need to study them further, taking into account the specifics of the EAEU countries.”

The discussion was also attended by Yuri Kofner, head, Eurasian sector, CCEIS, Higher School of Economics, who asked the speakers about the challenges and prospects of the creation of the financial megaregulator of the EAEU in Astana by 2025, and also about the expediency of introducing a Eurasian version of ECU in mutual payments within the member states of the Union.

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