What Currency Will be Used Along the OBOR?

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CDE Op-Ed Commentary

While there has been much discussion concerning trade along, and participation in projects aligned to, the One Belt, One Road (OBOR) scheme, there has been little examination of which currencies are likely to be used to fund such activities. A discussion is warranted, as the Chinese move to secure the position of the RMB as a global currency and the Russian Ruble remains backed by its own, significant energy resources and foreign reserves. The US Dollar and Euro, meanwhile, have not penetrated large amounts of either the overland or maritime routes, and although they are traded, there is a lack infrastructure or relationships with many of the regional OBOR markets.

There is also a growing regional dislike for trading in dollars, with the US having shown it is prepared to use its economic might to devalue other economies. This was demonstrated in the systematic depression of the value of oil, which occurred at the same time as the sanctions were imposed on Russia, which essentially saw the Russian economy shrink to a size equivalent to that of Italy. The Ruble lost significant value, and is currently at about the same purchasing parity level against the US dollar as the Sri Lankan Rupee, which is clearly absurd for a country whose 2016 GDP was USD1.27 trillion compared to Lanka’s USD80 billion.

The willingness of the US over the past few decades to use currency as a weapon is one of the reasons China has been so active in promoting the globalization of the RMB. It is now the fifth most traded currency in the world, yet still only comprises about 4 percent of the world’s total volume. The Ruble, without really having to try very hard, comes in at a ratio of 1.1 percent. By far and away the largest share belongs to the US, with the dollar comprising a huge 44.6 percent of all global trade, followed by the Euro at 28.3 percent, British Pound at 7.9 percent and Japanese Yen at 2.7 percent. However, the US dollar does not reign supreme in the geographical spread of the Silk Road.

In this environment, a number of interesting developments are occurring which will challenge the US dollar, at least regionally, with potentially further reaching consequences down the line.

The Chinese have been successful in having the RMB included as one of the “Special Drawing Rights” currencies adopted by the IMF at the end of last year. The SDR is an international reserve asset created by the IMF to supplement its member countries’ official reserves, and the RMB joins the US dollar, Euro, Japanese Yen and British Pound in being so. However, there is still some way to go before the RMB can be truly considered a globally traded currency. Steps are being taken to gradually increase the daily trade flow of the RMB, with several RMB international clearing hubs having been established, including one just opened in Moscow. China has also established a series of RMB clearing banks around the world, mainly operated by either the Bank of China or the Industrial & Commercial Bank of China.

Overseas RMB Clearing Services   

City                                    Country 

Bangkok                            Thailand

Buenos Aries                    Argentina

Doha                                    Qatar

Frankfurt                           Germany

Hong Kong                    Hong Kong SAR

Johannesburg                 South Africa

Kuala Lumpur                  Malaysia

London                        United Kingdom

Lusaka                             Zambia

Luxembourg                 Luxembourg

Macau                            Macau SAR

New York                     United States

Paris                                 France

Santiago                           Chile

Singapore                        Singapore

Seoul                               South Korea

Sydney                             Australia

Taipei                               Taiwan

Toronto                             Canada

Zurich                             Switzerland

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However, the RMB remains incomplete in terms of convertibility, and state level reform is still required by Beijing to prepare it for the next steps. The current cleanup of China’s banking system – long mooted but still working its way through – is some way off being completed, as are transparency issues with China’s official statistics and within the banking sector. Of more direct relevance to the OBOR, China has bilateral SWAP agreements in place with numerous overland route nations, including Belarus, Kazakhstan, Mongolia, Russia, Tajikistan, Uzbekistan and maritime route destinations such as Hong Kong, Indonesia, Malaysia, Pakistan, Singapore, Sri Lanka and Thailand.

Russia meanwhile is playing its cards close to its chest. It knows the Ruble is undervalued, and has taken the measures employed by the United States in terms of engaging in sanctions with it very seriously. In short, Russia has been quietly preparing itself for future trade expansion and engagements. It is now one of the least indebted countries in the world, and has one of the lowest debt ratios to GDP at about 15 percent. This compares with the EU at 100 percent and the United States at 105 percent. Russia is also sitting on huge energy reserves, and thus far hasn’t supported its currency in the same way against these as has occurred with the US and the Dollar. This means that the Russian Ruble has huge potential should Moscow wish to make it part of the global financial trading basket. At present, however, the Russians seem prepared to bide their time and concentrate on developing their own domestic strengths and those within its immediate trading orbit, such as the Eurasian Economic Union.

Russian banks also provide Ruble Clearing Services, and again these tend to be focused on the Eurasian region. Russia’s banking activities, especially in the EU have been suspended or curtailed due to sanctions, but this doesn’t apply to the OBOR footprint. Most are operated by either Sberbank or VTS.

Overseas Ruble Clearing Services 

City                                    Country 

Almaty                               Kazakhstan

Ashgabat                           Turkmenistan

Baku                                  Azerbaijan

Beijing                                   China

Bishkek                              Kyrgyzstan

Chisinau                              Moldova

Delhi                                      India

Dunshanbe                         Tajikistan

Istanbul                                Turkey

Minsk                                   Belarus

Tashkent                            Uzbekistan

Tbilisi                                  Georgia

Yerevan                              Armenia

When the Chinese RMB and Russian Ruble clearing services are added together, it makes it clear that the OBOR is not going to be linked to US dollar values. There is little infrastructure or motivation to include the Euro either. Russia’s banks remain under sanctions in the EU, and the Euro isn’t having a particular good time of it at the moment. This clears the way for large parts of the Eurasian land mass to be denominated in both RMB and Ruble as preferred currencies.

In fact, China and Russia have already made steps to make this happen. The two countries agreed to make cross-border settlements in both RMB and Ruble a few years ago, and some Chinese and Russian border cities will accept both currencies. Beijing and Moscow also agreed a three-year, US$22.89 billion currency swap deal at the end of 2014. Bilateral trade between the two countries is expected to hit US$200 billion by 2020 – an amount roughly double the current volume of bilateral trade between China and the United States.

The Chinese-Russian ties also extend to the Asian Infrastructure Development Bank (AIIB) where Russia is the third largest investor after China and India. Moscow has also been discussing with Beijing over Russians issuing RMB designated bonds – a move that could see Chinese brokerages providing access for their clients to Russian securities traded in Moscow, and also provide assistance for Chinese companies that want to list their securities on the Moscow bourse.

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The implications are clear. Should both China and Russia make a decent job of putting in infrastructure along the OBOR routes, the global significance of the US dollar will start to decline. This will put fiscal pressure on the United States and upon economies with strong links to the dollar. Quite how the OBOR region uses the RMB and Ruble remains to be seen, the RMB is currently better positioned than the Ruble on a global scale, while the Russians have a better and more entrenched distribution and control system in place along the Silk Road. The Ruble is also very much undervalued right now, and Russia can support any increase in its usage with its energy reserves, just as the US has done in the past with the Dollar.

Other currencies will be waiting to see how this pans out. The Euro has its own problems at present, and the political landscape within the Union still needs time to work itself through. Should sanctions against Russia be dropped, an obvious potential tie-in is for Brussels to work with both Moscow and Beijing to learn how the Euro can be influential within OBOR project financing, a situation that also applies to the British Pound. The Japanese too will also be keen to see the Yen participate; they are a nation of considerable manufacturing and technological knowledge, much of which they would happily put into the OBOR regions. How much influence the Japanese have will to some extent depend on Russian diplomacy, and persuading Beijing to be less exclusive of Tokyo.

The winners in this appear to be the Chinese RMB and Russian Ruble, with the US Dollar losing leverage. It remains to be seen how the Euro, Pound and Yen can effectively embrace the Eurasian dream, and to what extent Moscow and Beijing can be seen to politically trust Brussels, London and Tokyo. A lot of damage has been done in recent years, especially in terms of Europe’s relationships with Moscow. Much diplomacy is required should Europe, the UK and Japan not find themselves reduced to fringe players from what may become increasingly dominant, regional currencies in use across Eurasia.

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