DOLLAR HEGEMONY OVER, A NEW ROAD MAP IN VIEW

 SCO Summit Decides on a New Course of Action

The leaders of the Shanghai Cooperation Organisation (SCO) at the recent summit at Samarkand have decided to conduct bilateral trade and investment and issue bonds in local and national currencies instead of US dollars and UK Pounds or Euros.

The group - which comprises China, India, Russia, Pakistan and Iran alongside four Central Asian states - in a declaration said "interested SCO member states" had agreed on a "roadmap for the gradual increase in the share of national currencies in mutual settlements", and called for an expansion of the practice.

The declaration did not say who the "interested states" were. It is significant that Iran, like Russia, subject to broad international economic and financial sanctions, has also joined the SCO and is an oil-producing country.

Both China and Moscow are the driving force behind the push toward national currencies as it tries to reduce their reliance on the U.S. dollar and other Western currencies for trade following the imposition of sweeping new Western sanctions in response to the Ukraine crisis.

In his speech at the summit, Chinese President Xi Jinping said: "We need to ensure implementation of the roadmap for SCO member states to expand shares of local currency settlement, better develop the system for cross-border payment and settlement in local currencies, work for the establishment of an SCO development bank, and thus speed up regional economic integration".

The Chinese yuan became the most traded currency on the Moscow Exchange for the first time on October 4, 2022, with trading turnover in the yuan-ruble pair reaching 70.3 billion rubles ($1.17 billion), surpassing the 68.2 billion rubles for the dollar-ruble pair. A total of 64,900 transactions were made using the yuan-ruble pair, compared with 29,500 for the dollar-ruble pair on the same day. The yuan also overtook trading in the euro-ruble pair, which recorded a trading volume of 47.5 billion rubles.

In the first eight months of 2022, trade between China and Russia totalled $117.2 billion, up 31.4 percent year on year.

In early September, China and Russia reportedly signed an agreement to switch trade payments for gas supplies to China to the yuan and the ruble based on a 50-50 split, instead of the dollar, paving the way for a more frequent ruble-yuan usage in bilateral trade.

In the first week of September, the Russian gas producer Gazprom said China would pay for half its Russian gas supplies in rubles and half in Chinese yuan. Previous contracts have been denominated in euros or dollars, the dominant reference currency for the global oil trade.

In August, Russia's largest gold miner, PJSC Polyus, completed the issuance of 4.6 billion yuan in bonds, less than one month after Russian aluminium company Rusal issued 4 billion yuan-denominated bonds in the Russian market. The bonds were listed on the Moscow Exchange with a coupon rate of 3.8 percent. The bond underwriter was Gazprombank.

The issuance of foreign-currency bonds means China is a strong economy, has stable financial and monetary policies and a large capital market volume. 

Russian firms and banks were involved in almost 4 percent of international yuan payments by value in July. That was an increase from 1.42 percent the previous month and zero in February when the Russia-Ukraine conflict began.

Yuan-ruble trading volumes have soared 1,067% since the Ukraine crisis, though this is broadly seen as a sign of the allies strengthening ties to help weaken the influence of the US.

Most recently, the People's Bank of China announced it is developing a yuan reserve with the Bank for International Settlements and five other nations, including Singapore and Hong Kong. Each of the members will contribute about 15 billion yuan, or $2.2 billion. 

Also, China will push for the expanded use of the digital yuan from the first four trial cities -- Shenzhen in South China's Guangdong Province, Suzhou in East China's Jiangsu Province, Xiongan New Area in North China's Hebei Province and Chengdu in Southwest China's Sichuan Province -- to province-wide testing, to ramp up the innovation of the digital yuan.

China's Ministry of Finance and the Macao Special Administrative Region (SAR) government have jointly announced a plan to issue yuan-denominated treasury bonds worth 3 billion yuan in Macau on September 7, a move to strengthen financial cooperation between the Chinese mainland and the SAR. And, the Ministry of Finance issued yuan-denominated treasury bonds worth 5 billion yuan in the Hong Kong SAR on August 10.

India is planning to buy Russian oil at discounted prices and even consider the Chinese yuan as a reference currency in an India-Russia payment settlement mechanism. Saudi Arabia is in active talks with Beijing to price some of its oil sales in yuan.

According to bankers, imports from Russia can be paid in yuan via multiple mechanisms. One way is that an India-based bank exchanges US dollars for yuan from its offshore branches in China or Hong Kong.

Another way is for an India-based bank to tie up with a Chinese bank for settlements. It is also possible for an Indian company to directly take a loan in yuan from a China-based bank.

Most state-run banks send dollars to their offshore branches in Singapore, Hong Kong or China.

In June, some 30% of the payments by Indian entities for the commodity were in the Chinese yuan and 28% in the Hong Kong dollar. The euro accounted for under a quarter and the UAE dirham around a sixth.

In July, Russia became India’s third-largest coal supplier with record imports of 2.06 million tonnes.

UltraTech is importing "157,000 tons of coal from Russian producer SUEK that is loaded on the bulk carrier MV Mangas from the Russian Far East port of Vanino," an Indian customs document reviewed by Reuters shows, while the settlement currency is in yuan, with the total cargo valued at 172,652,900 yuan ($25.81 million).

The Road Map

Details and a road map against the US dollar had been finalized and signed at SCO’s Finance Ministers’ meeting in Moscow as early as March 2020, after which the plan was temporarily shelved due to COVID. Representatives from the finance ministries and central banks of China, India, Russia, Pakistan, Kyrgyzstan, Tajikistan and Uzbekistan attended the Moscow conference. In addition, Iran, Afghanistan, Belarus, and Mongolia were also present as observer nations.

During the meeting, Russia’s Foreign Minister Sergey Lavrov suggested that "each SCO member decide whether they want to use the dollar for transactions, but facts are enough that this currency is unreliable".

The currency roadmap was also agreed upon at the  15 July 2022 meeting of the SCO countries’ industry ministers in Tashkent, as well.

The SCO is the largest regional organisation in the world in terms of geographical coverage and population, covering three-fifths of the Eurasian continent and nearly half of the human population. The new measure will contribute to the stability of monetary systems and the security of the financial activities of the SCO  countries.

Retaliation Against the US War

Former US President Donald Trump had deeply weaponised the dollar during COVID and trade with China was labelled a ‘war’. There have been unilateral sanctions placed on perceived threats and ‘enemy' countries. Countries like China, at the receiving end, have been preparing to hit back, and now it has become a reality.

Trump used sanctions and stopped Russian companies like Rusal Aluminium from accessing the dollar-based financial system in 2017 and then on Rosneft Oil in 2020. Since then the US has had over 30 active financial-and trade sanctions that cut access to the Federal Reserve that have severely destabilised and targeted weaker economies like Iran, Iraq and Venezuela. Trump tried to pressurise the IMF not to assist Iran with the COVID relief package.

As a consequence, all these countries established linkages with China and Russia for trade and economic sustainability. Russia is selling Venezuela’s crude oil. China diverted Iranian crude with Yuan payments and initiated the Iran-China silk route agreements. China is now Iran’s largest trade partner. Iran has diversified trade with Afghanistan and oil for gold with India.

China and Russia have several measures already as cross-border inter-bank payment systems parallel to SWIFT. Both have increased gold holdings to back their currencies and initiated national currency swap agreements in several regional and bilateral arrangements where they play a role.

The BRICS’s New Development Bank, proposed disbursements in national currencies in 2015. In the April 2020 annual board of governors meeting with BRICS finance ministers, the president of the bank K.V. Kamath said that in 2019, a quarter of the USD 15 billion of financial assistance was given in local currencies. He said that BRICS had no intention of destabilising the dollar but  “50 per cent (of projects) should be local currency financed”.

China is reducing its share in US treasury bonds and preparing for currency swap facilities as part of the Belt and Road Initiative (BRI) and in the Regional Comprehensive Economic Partnership with South-East Asian countries. Most of the ASEAN countries are ready for this.

Russia, previously a top holder of US sovereign debt, has radically decreased its holdings because of sanctions. Russia’s strategic relations with China deepened after the 2014 partnership and energy-centred agreements. In 2017, Ruble-Yuan's‘ payment versus payment’ started along the BRI. In 2019, the two countries switched to the Yuan RMB and Ruble in exchange for their USD 25 billion trade.

Russia has been pushing for currency swap agreements with various trade partners. The Eurasian Economic Union with Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia comprises the ‘road’ part of the BRI. With a population of 183 million and a GDP of some US$ 5 trillion, 70%  of its trade is in Rubles and local currencies. Several Central and West Asian countries want to join this union and Vietnam already has a full trade agreement with them. This saves the exchange charges of the dollar.

Russia revived trade in national currencies that were earlier used during the Soviet period within the communist bloc and with India. This exchange ended with the disintegration of the Soviet Union. 

In 2019, India switched again to Ruble payments for Russian S-400 defence systems because of US sanctions on Moscow. India worked out local currency trade with the UAE and approved USD 75 billion currency swaps with Japan and USD 400 million currency swaps with South Asian countries. India notified non-dollar-mediated rates of exchange for Turkish and Korean currencies. Turkey is trading in national currencies with China and Russia. Russia proposed trade in Euros with the EU.

China is internationalising the Yuan RMB which is included in the IMF basket, has risen to fifth place as a global currency and represents 15% of global currency holding. Russia has 25% of Chinese RMB international reserves.

The US Debt and Shadow Banks

The problem remains that the Yuan is not presently liquid enough for financial markets. So currency will be diversified with no currency maintaining complete hegemony.

Financial markets are complex and the US dollar is still the preferred currency. But countries have followed the contradictions within US policies – like raising debt ceilings to sustain the dollar as a global currency and even concealing lending to certain foreign banks – and have decided they need to protect themselves from this militarised dollar.

The debt ceiling is the maximum amount of money that the United States can borrow cumulatively by issuing bonds. If U.S. government national debt levels bump up against the ceiling, the Treasury Department must resort to other "extraordinary" measures to pay government obligations and expenditures until the ceiling is raised again.

The debt ceiling has been raised or suspended numerous times over the years to avoid the worst-case scenario, which would be a default by the U.S. government on its debt.

There has been controversy over whether the debt ceiling is constitutional. According to the 14th Amendment of the Constitution, "the validity of the public debt of the US, authorized by law...shall not be questioned." The majority of democratic countries do not have a debt ceiling, making the United States one of the few exceptions. The approximate amount of the current U.S. debt ceiling is $ 31.4 trillion, as set by the Congressional vote on 15 December 2021, and signed into law by President Biden on December 16 of the same year. The sum represents a $2.5 trillion increase in the ceiling.

Hitting the debt limit and failing to pay interest payments to bondholders would have grave economic consequences. The United States government would be in default, lowering its credit rating and increasing the cost of its debt. This would throw the U.S. economy into a tailspin.

Another worry for the US is shadow banking- it symbolizes one of the many failings of the US financial system leading up to the current financial crisis.  It is referred mainly to nonbank financial institutions that engaged in what economists call maturity transformation. Commercial banks engage in maturity transformation when they use deposits, which are normally short term, to fund loans that are longer term. Shadow banks do something similar. They raise  (mostly borrow) short-term funds in the money markets and use those funds to buy assets with longer-term maturities. But because they are not subject to traditional bank regulation, they cannot—as banks can—borrow in an emergency from the Federal Reserve (the US central bank) and do not have traditional depositors whose funds are covered by insurance; they are in the “shadows.”

There are now myriad types of entities in the US, performing these intermediation functions, and they are growing all the time. During the financial crisis, investors became skittish about what those longer-term assets were worth and many withdrew their funds at once. To repay these investors, shadow banks sell assets. These “fire sales” generally reduce the value of those assets. 

But in the US, real banks were caught in the shadows, too. Some shadow banks were controlled by commercial banks and for reputational reasons were salvaged by their stronger bank parent. In other cases, the connections were at arm’s length, but because shadow banks had to withdraw from other markets—including those in which banks sold commercial paper and other short-term debt—these sources of funding to banks were also impaired. And because there was so little transparency, it often was unclear who owed (or would owe later) what to whom.

The share of the US dollar assets in the foreign exchange reserves of global central banks, a sign of the dollar's supremacy, dropped to 59 percent in the fourth quarter of 2020 - a 25-year low, the IMF reported last May. The share further dropped to 58.88 percent in the first quarter of 2022, IMF data showed.

Thus, because of the US crisis, the Chinese aphorism “hide your capability and bide your time” has become popular in much of Eurasia’s national currency transitions. President Biden's absurd declaration that COVID is over, makes it clear that the economy is also sick.

© Ramachandran 

The G7 Summit and India Buying Oil From Russia

 

The G7 is perplexed and confused by the Ukraine crisis

Scarred by reliance on Russian energy that has hampered several European nations from going all out to punish Russia, the just-concluded G7 summit was also warily looking at its systemic rival, China.  The summit in Germany was dominated by manoeuvers to tighten the noose around Vladimir Putin without leading to disastrous spillovers- a backlash among Western consumers, starvation in a rain grain-starved global South and a breakdown in the global order are imminent unless the West shows wisdom.

The summit devised a $600 billion plan for the developing world, as a counter to China's Belt and Road Initiative (BRI). It is called the Partnership for Global Infrastructure and Investment (PGII) and is a relaunch of an unclear scheme unveiled at last year's G7 meet in Britain. 

The plan calls on G7 leaders to raise the fund over five years to launch infrastructure projects in middle and low-income countries. The U.S. has promised to raise $200bn of the total through grants, federal funds and private investment, while the EU has announced a further 300bn euros.

Unlike BRI, the one proposed by the G7 would provide funding largely from private investors. The G7 fund will focus on climate initiatives, among other projects, including a $2 billion solar farm investment in Angola, $320 million for hospital construction in the Ivory Coast, a vaccine manufacturing facility in Senegal, a 1,609 km submarine telecommunications cable connecting Singapore to France via Egypt and the Horn of Africa, and $40 million to promote regional energy trade in Southeast Asia.

Ban on Russian Gold and Cap on Oil

Ahead of the summit, London announced that the U.K., along with the U.S., Japan and Canada, would ban new imports of Russian gold to tighten the sanctions. The U.K. said that Russian gold exports reached around $15.5 billion in 2021 and that this figure has gone up since sanctions were imposed as a means of getting around them. Russia accounted for about five percent of all gold exports in 2020 and 90 percent of Russia's output went to G7 countries -- mostly to Britain.

The new sanction would have only a limited impact; similar to energy products, Russia could contain the damage by turning to emerging markets.

Twin caps on the price of Russian oil and pipeline gas to slash the Kremlin’s revenues also gathered support at the summit. The gas cap would operate simply by European countries refusing to pay above an as-yet-unspecified fixed price for Russian gas. But the idea of putting a cap on Russian oil would be unfeasible in reality, and these absurd measures reflect the unfathomable dilemma of the West.

Moreover, Germany is queasy about price caps. It fears a bust-up inside the EU over the proposal and that Putin may simply turn off the supplies of gas to Europe. A cut-off now would leave Europe struggling to build up the gas reserves it needs to survive a fraught winter. EU countries have been directed to fill their gas reserves to a minimum of 80% but they are well short of that.

India's Presence

The G7 is an informal forum bringing together the leaders of the world’s leading industrial nations – the U.S., the U.K., Canada, France, Germany, Italy, and Japan. It was formed in 1975, as the world suffered from the first oil shock and financial crisis. Canada joined in 1976 and Russia in 1998. Following the annexation of Crimea, Russia was suspended in March 2014.

Apart from India, other nations which got invited to the current summit were Argentina, Indonesia, Senegal, and South Africa.

At the summit, referring to the Ukraine war, which has pushed up energy prices across the globe, Indian Prime Minister Narendra Modi said that “energy access should not be the privilege of only the rich. A poor family also has the same rights on energy. And today, when energy costs are sky-high due to geopolitical tensions, it is more important to remember this.” Obviously, it was a dig at the West, and he was justifying India's decision not to denounce Russia, and to buy discounted oil from Russia.

Modi has frustrated the West, also by imposing a ban on wheat exports. India will continue to buy oil from Russia, possibly with the Chinese Yuan as the reserve currency, in future. India’s top cement maker UltraTech did pay for Russian coal in Yuan, in June, for the first time, in history.

A Weak Summit

The summit was weakened by the fact that only 90 minutes were set aside to discuss food,  climate and health. Discussion of debt or the injection of new Special Drawing Rights funds, two cardinal issues of Africa, were ignored. A weariness exists in Africa about the G7’s failure to deliver on pledges made in G7 communiques. In 2015, G7 leaders pledged “to lift 500 million people in developing countries out of hunger and malnutrition by 2030”. But according to Oxfam, “In 2015, there were 630 million in hunger. As of 2021, this figure is thought to be 950 million.”

None of the visiting leaders was enthusiastic about the Ukraine war. The President of Senegal, Macky Sall, as chair of the Africa Union, has warned that the poorest countries are “caught between the hammer of war and the anvil of sanctions”.

Alberto Angel Fernández, the President of Argentina, the world’s sixth-largest wheat exporter facing 60% inflation, has increased levies on food exports. 

The Fissures Within

Embittered by the food crisis, fissures have developed in the G7 camp. The vexatious parleys on reaching an agreement on safe passage for grain convoys, overseen by Turkey and the U.N., have lasted a month, and some countries are on the brink of penury.

The plan to ban imports of Russian gold trailed by the US and the U.K. does not yet have the full support of the EU.

The G7 fears the BRICS willingness to expand, and hence the G7 is unlikely to create a vacuum for China to fill by boycotting the upcoming November meeting of the G20.

Those who attended the G7 summit and the subsequent 2022 NATO summit in Spain tried to present a gait of bonhomie, though they are facing internal squabbles. Though officials from Germany and Britain were reported to push for temporary waivers on biofuels mandates to mitigate soaring food prices, Germany had to drop the idea during the summit due to resistance from the U. S. and Canada.

There is also a dispute over climate actions. A communique, released in May, said the G7 agreed to achieve "predominantly decarbonized electricity sectors" by 2035. However, the ministers failed to set a date for phasing out coal-powered energy due to objections from the U.S. and Japan. They continue to clash on coal.

The squabbles won't end in Madrid for NATO, as Turkey's concerns have added hindrance to Finland's and Sweden's pursuit of NATO membership.

False Narrative

Showcasing the PGII, the G7 blamed China for pushing the developing countries into a debt trap, through BRI. Hitting back, China has asserted that the days when global decisions were dictated by a "small group" of countries are long gone. 

The Chinese foreign ministry has clarified that calling the BRI a debt trap is a false narrative. According to the World Bank forecast, if all BRI transport infrastructure projects are carried out, by 2030, the BRI will generate $1.6 trillion of revenues for the world each year, or 1.3% of global GDP. Up to 90% of the revenues will go to partner countries. The BRI could contribute to lifting 7.6 million people from extreme poverty and 32 million from moderate poverty from 2015 to 2030. 

The competition between China G7  will enable some developing countries to have more choices. But if the crude U.S. political agenda forces these countries to take sides, they will be in a quandary. Herding all developing countries into a US-led global economic order is a weird illusion.