Why is the trend of using national currencies in international trade rising?
In recent years, demands for the use of national currencies in trade exchanges between countries have increased, demands that have been linked to the current context of the global economy. Estimates of global trade indicate the dominance of the US dollar on a large scale on the movement of this trade; It is used in at least four times US foreign trade. For most developing or emerging countries, the dollar dominates about 90% of their total trade with the outside world, but after the financial crash of 2008, many countries struggled to access the US dollar to save their national currency; As the US Federal Reserve tightened its grip on the global reserve currency, the resulting liquidity shortage made it difficult to access many currencies; This led to a decrease in its value against the dollar. In search of solutions, many countries have proposed removing the dollar from trade, and conducting bilateral trade in national currencies.
key indicators
In recent years, with the increased use of economic sanctions by the United States, many countries have become more motivated to explore trade using national currencies, and to use international payment systems other than the international system “SWIFT” which is heavily influenced by the United States. The role of national currencies has already grown recently following the largest-ever US-led sanctions against Russia after Moscow launched a military operation in Ukraine. The most important indicators of the rise of national currencies in trade between countries are as follows:
1- China and Russia lead the global de-dollarization trend: Globally, China, Russia and India are leading massive efforts to conduct trade in national currencies, especially after Russia fell under Western sanctions in 2014. To enable such a process, Russia and China established their own payment mechanisms Instead of the global SWIFT system, SPFS and CIPS, for bilateral and multilateral operations, India has also joined in these efforts; Whereas, India’s decision on international trade via national currencies can be considered a landmark event; Not only to enable rupee and ruble trade, but to boost New Delhi’s trade in its immediate and extended neighborhood as well, including Iran, Central Asia and the South Caucasus.
In line with this trend, the Shanghai Cooperation Organization (SCO), whose countries represent about 30% of global GDP, discussed in March 2022 a draft roadmap for SCO member states to increase the share of national currencies in mutual settlements. Efforts are expected to accelerate this year to overcome Western sanctions against Russia, the main member of the organization.
2- India’s drive to internationalize the rupee: India’s new decision on local currency trade is expected to boost trade through the International North-South Transport Corridor (INSTC); Whereas, the internationalization of the rupee could lead to a multipolar financial structure envisioned by the BRICS; The countries of Central Asia and the South Caucasus have strong links with the Russian regimes, and thus the use of the rupee in trade with these countries allows India to serve India’s economic interests. These facts may lead to a multipolar world system, and in turn lead to the possibility of creating more complex systems of economic interdependence among the major countries, and to a decrease in conflict between states because of this, and to a more equal balance of forces between them.
3- Middle Eastern countries strengthening the role of local currencies: In the Middle East and North Africa, Turkey sought to expand its trade links with national currencies in the region and abroad, and Turkey signed, in January 2022, a currency exchange deal of about $5 billion with the UAE for a period of three years. And signed a similar agreement with Qatar in May 2022, worth $15 billion. Globally, Turkey has signed swap agreements for trade in national currencies with Russia, China, South Korea and some Islamic countries. It is expected that regional powers will deepen the settlement of intra-regional trade and financial transactions in their national currencies further.
4- Iranian interest in using local currencies in exchanges: Iran conducted trade in national currencies with Lebanon, Syria and Iraq, and seeks more trade with Turkey, which was reluctant to develop its trade in national currencies due to the sanctions imposed on Iran. Iran is driven by its desire to overcome Western sanctions and expand its trade in national currencies with Russia, India and China. In this context, Iran focused on cooperation with India in trade in the local currency; Where the rupee trade was used to export gas and oil; If both countries launch the Iranian riyal rupee trade mechanism, bilateral trade can grow to $30 billion, and the rupee-rial trade mechanism can help companies from both countries to deal with each other directly and avoid third-party mediation costs.
This trend was manifested in Iranian-Russian relations; Last January, Iranian President Ebrahim Raisi stated that Tehran and Moscow discussed monetary and banking issues, and agreed to remove trade barriers to increase trade to the equivalent of $10 billion annually; By taking steps to break the dominance of the dollar over monetary and banking relations and trade in the national currency, the two countries also signed a memorandum of understanding, in July 2022, to use their national currencies in small commercial transactions.
5- Warnings of weakening the dominance of the dollar in international trade: A senior official in the International Monetary Fund warned that the unprecedented financial sanctions imposed on Russia after its military intervention in Ukraine threaten to gradually weaken the dominance of the US dollar and lead to a more fragmented international monetary system; The sweeping measures imposed by Western countries following Russia’s military intervention in Ukraine, including restrictions on its central bank, may encourage the emergence of small currency cartels based on trade between separate groups of countries.
Many international experts agreed with the International Monetary Fund, and also argue that the extremism that Washington has gone to trying to punish Russia has made other countries realize the importance of bypassing any dependence on the US dollar and on any US-backed financial system, and fragmentation on a smaller level It is certainly possible; Recently, some countries have been seen renegotiating the currency in which they are charged for trade.
favorable context
Trading in national currencies can ease concerns about the use of the dollar in trade; This helps countries import raw materials and energy at reasonable prices for their manufacturing activities. However, there are several limitations to be aware of . The most important reasons for countries resorting to trade exchange in national currencies can be explained through the following :
1- Legalization of dependence on the dollar in international transactions: The rise in the value of the US dollar pushes the value of goods and services to holders of other currencies, which pushes countries to search for an alternative; Recently, the dollar index rose against a basket of major currencies, to the highest level in more than 20 years, which increases pressure on countries that suffer from the decline of their economies as a result of the repercussions of the Corona pandemic and the outbreak of the Russian-Ukrainian crisis, and fears of high inflation rates, and the collapse of currencies is considered a negative event; Because it makes imports more expensive, in addition to causing a deterioration in the standard of living of individuals, and increasing the cost of trade. Also, the high correlation of global trade movement with the dollar leads to undermining some of the privileges and benefits that the economies of countries can derive from flexibility in controlling currency rates. When the value of the dollar rises, global trade tends to contract.
2- Strengthening the balance of payments of countries: the movement of trade in the national currency creates possibilities for the development of reciprocal settlements in national currencies; Because the US dollar becomes an unsafe currency in light of the policy of the US Federal Reserve, and the expansion of the use of national currencies in trade, will contribute to the growth of predictability in the global economy, and strengthen the balance of payments for countries.
It is worth noting that there is data issued by the International Monetary Fund, according to which the dollar’s share in the global reserves of central banks in the time period from the fourth quarter of 2020 to the second quarter of 2021 is the lowest in five years at 59%. The use of national currencies between countries began to gain momentum in trade exchanges; To reduce dependence on the dollar, while it is getting stronger and higher, which increases pressure on central banks in emerging countries.
3- Supporting the international standing of some alternative currencies: It is a variable related to the view of many countries of the current international system, and the desire to shift towards a pluralist system. In this context, there is now another basket of currencies other than the dollar, which enjoys increasing international confidence, and is being traded in international trade and to support foreign reserves. The most prominent of these currencies are: the euro, the Japanese yen, the British pound and the Chinese yuan. The Chinese yuan is on the list of the most important of those currencies; Where the share of the Chinese yuan in official foreign exchange reserves jumped to 2.8% in the last quarter of 2021, which is a record high since the corresponding quarter of 2016, and ranks fifth in the world, according to data issued by the International Monetary Fund, especially that financial sanctions The unprecedented imposed on Russia threatens to gradually loosen the hegemony of the US dollar. China has also signed agreements to exchange local currencies with many countries in the world, including some countries in the Middle East such as Turkey.
4- Response to Western Sanctions Policies: The recent increase in the use of national currencies in trade exchanges is inseparable from the existing crises in the international system, which reflected a strict Western method of interaction through the expansion of imposing sanctions on other countries such as Iran and Russia. Therefore, the use of national currencies in commercial exchange was one of the tools to circumvent Western sanctions and mitigate their negative effects.
stability dilemma
Despite the growing tendency to use national currencies in exchanges, these currencies are not always stable, and can easily be affected by local economic and monetary policies; In Turkey, the value of the lira fluctuated sharply in November 2021. Similar things are happening in China, which exercises tight controls on its currency in order to maintain its competitiveness on imports in the global market. While national currencies are viable for short-term trade, they remain unreliable in the long term as a savings option or as reserve currencies that can stand the test of time, changing politics, geopolitics, and international alliances.
National currencies are particularly unstable for countries with small economies, unstable political systems, and lack the ability to protect themselves from external threats. Hence, national currencies may be used more realistically by regional and global powers only, and their global adaptation will have limits.
In conclusion, the move towards de-dollarization of world trade is still in its first stage. However, the Russian-Ukrainian crisis may have accelerated the growing move toward trade in national currencies to avoid weaponizing the dollar and US sanctions . In general, it remains to be seen whether international mechanisms will be established to formalize such steps and discuss the provision of guarantees that can protect such a trading system from different types of shocks, such as domestic instability and international conflicts; In the Middle East and North Africa region, Iran and Turkey are likely to remain the main powers supporting this idea. However, realignments may hinder or slow down such efforts; As both countries approach from the west.
Despite the efforts made by many countries in attempts to get rid of the dollar’s dominance over the global trade movement, the world is still stuck with the US dollar, not because it creates an exorbitant privilege for the American economy that Washington will fight for, but because it allows many of the largest economies in The world is using a portion of US demand to fuel domestic growth.
Written by Sania Abdel-Qader Nile – Interregional for Strategic Analytics
