October 05, 2018
The Islamic Republic likes to boast that, along with Russia, it will break the back of the US dollar in international trade. When Mahmud Ahmadi-nejad was president, he liked to say that he alone had already broken the back of the US dollar and that other countries were fleeing the dollar as a medium of exchange.
They weren’t fleeing then and they aren’t fleeing now. Iran doesn’t have the heft in international trade, not even if it were fully supported by Russia—or even if Turkey joined in, as its president now likes to campaign against the dollar, too.
The dismal performances of the Turkish lira (down 38 percent against the US dollar so far this year) and the Russian ruble (down 14 percent), not to mention the rial (down 64 percent), are strong evidence of how even relatively limited US sanctions or the threat of harsher ones can hurt an economy.
But could the US be going too far with the weaponization of its economic advantage? Could its aggressive use of sanctions end up undermining the dollar’s global dominance? A number of analysts think Donald Trump is a far bigger threat to dollar dominance than the Islamic Republic of Iran and its buddies.
Turkey is “preparing to trade in our local currencies with the countries with which we have the largest trade volume, such as China, Russia, Iran and Ukraine,” Turkish President Recep Tayyip Erdogan said in response to the US adminis-tration’s recent doubling of import tariffs on Turkish steel and aluminum and personal sanctions against Turkish officials.
Russia faces increased US sanctions for a spate of adver-sarial activities. These could include a ban on the purchases of new Russian debt and orders limiting Russian state banks’ ability to deal in US dollars.
Visiting Ankara last month, Russian Foreign Minister Sergey Lavrov said, “I’m confident that such a gross abuse of the role of the US dollar as a world reserve currency will undermine that role. To be on the safe side, more and more countries, even the ones that are not affected by US sanctions, will gradually stop using the dollar and rely on more dependable partners with whom they can agree on using their currency.”
Anton Siluanov, Russia’s finance minister and, as first deputy prime minister, the country’s most senior economic official he couldn’t rule out moving Russia’s trade in natural resources to a national currency basis. “Essentially, the US dollar, which was considered the global currency, is becoming a risky instrument for settlements,” Siluanov said in a state TV interview. He didn’t explain why anyone would want to trade in the loopy ruble, however.
Iran has been keenly interested in bypassing the dollar for far longer than Moscow and Ankara—in fact, given the severity of the sanctions re-imposed by the Trump Administration, it has no other choice.
Leonid Bershidsky, an analyst with Bloomberg, says dealing in a number of national currencies across borders is less and less of a problem as financial technology develops. University of California, Berkeley professor Barry Eichengreen has argued that the growing ease of switching between currencies undermines the dollar’s monopoly. The problem with this, though, is that the currencies can be highly volatile—as the ruble, lira and rial are showing this year. Stability is one of the advantages the dollar offers to importers and exporters. The likelihood that companies will help Russia, Turkey and Iran realize their threats isn’t high, Bershidsky writes.
Besides, according to the World Trade Organization, Russia, Turkey and Iran account for just about 4 percent of the global trade in goods (excluding trade among European Union countries) and some 3 percent of the trade in services.
Both Russia and Turkey have dramatically reduced their US debt holdings in recent months, but that was a mosquito bite to the US, since their investments were dwarfed by those of countries such as China, Japan and Brazil.
Russia, Turkey and Iran need a strong partner to lend market heft to their vocal dissatisfaction with the dollar. But Bershidsky writes, “The European Union isn’t it…. Shifting trade from dollars to euros would create a new dependence on Western democracies with their inconvenient values‑—and perhaps also add risk: The recent euro area economic crisis is neither forgotten nor quite overcome.”
That pretty much leaves China, as interested as the three mavericks in undermining what it sees as the dollar’s unfair advantage. But Bershid-sky says boosting the ren-minbi’s international status would be a more realistic scenario for China than trading in national currencies.
Despite having raised the renminbi’s share of its trade settlements from zero in 2010 to 25 percent in 2015 and making it the second most popular currency in the world for trade finance (ahead of the euro), China faces an uphill battle in winning global share for its currency. In June 2018, according to SWIFT, the payment facilitation service, the renminbi’s share of global payments reached 1.81 percent compared with 39.35 percent for the dollar.
China needs to gain a bigger advantage over the US in global exports for the renminbi to become competitive against the dollar. According to a paper published this year by Harvard University’s Gita Gopinath and Jeremy Stein, “if the gap between Chinese and US shares in world exports widens far enough, we could eventually get to a point where a renminbi-dominant equilibrium becomes inevitable. At this point, the dollar’s share in global trade and finance could potentially decline quite sharply.”
If the anti-dollar mavericks shifted to the renminbi for trade, they could help bring that moment closer. But Bershidsky warns, “Unfortunately for them, such a shift carries short-term risks they can ill afford to shoulder.”
He explains, “This year, the Shanghai International Energy Exchange launched renminbi-denominated oil futures. While daily trading volume has increased six fold since the March launch, the contracts turned out to be not for the faint-hearted, in part because of the renminbi’s exchange rate swings and in part because of their design disadvantages compared with global dollar-denominated benchmarks such as Brent and WTI futures. Putting one’s eggs in the Chinese basket can be costlier than still using the dollar for most trade.”
For now, it appears the Trump Administration can act with impunity, imposing sanctions right and left. “Even China’s enormous pull isn’t enough to get the anti-dollar bunch where it wants to be — in a world where the US is powerless to punish them economically,” Bershidsky concludes.