Dedollarization and trading in local currencies

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In the midst of the U.S. elections, pandemic and vaccine studies, there was another serious development that was overlooked when discussing trade wars, one that was not talked about enough, yet continued at full speed in the background, which was Russian President Putin stating that the U.S. was using the dollar as a weapon.

De-DOLLARIZATION CAMPAIGN FROM RUSSIA

The Russian economy has been struggling under U.S. sanctions and trade restrictions for some time now. In fact, the situation has become such that even European Union countries that buy natural gas from Russia have from time to time become subject to sanction threats from the U.S. Department of State and Treasury. 

Putin, who took the stage during that same period, went to the St. Petersburg International Economic Forum, “Our American partners are forcing us to do this. We do not consciously abandon the use of the dollar, we are forced to do so.” He declared that Russia is in a process of de-dollarization.

In the same speech, Putin said that the United States uses the power afforded to it by the dollar as the reserve currency and the fact the greenback is the global trade of certain commodities as a sanction weapon against other countries. Russian Finance Minister Anton Siluanov also announced that they will completely liquidate their dollar assets in the National Welfare Fund, which has a volume of approximately 185 billion dollars, in the next month, and the share of euro, gold and yuan will be increased instead.

A MATTER OF TRADE WITH LOCAL CURRENCIES

The Greenback is the global reserve currency. Meanwhile, the U.S. dollar is used in global trade and even in the universal reporting of macroeconomic data of countries. Of course, it is necessary to recall that behind this is once again the historical role played by the Bretton Woods Conference in 1944. 

At a time when the Second World War was still raging, yet when it became clear who would emerge victorious, the United States wisely convened a conference, in which the IMF was born, to plan the post-war global economy, and had the whole world accept the agreement that would make the dollar a global reserve currency. This system continued until 1971 and ended with the Nixon Shock, as then then-U.S. president stated: “I am no longer committed to gold, I will not give gold to those who bring dollars.”

Of course, despite the fact that that system became a thing of the past, the U.S. dollar did not lose its standing as a reserve currency. Because in the years that followed, the American government made an agreement with the Saudi Royal family, allowing oil to be traded only in dollars. The concept of the “petro-dollar” was thus born when other OPEC member countries adopted this decision as an example to emulate. Although for a long time, global oil trade was carried out using Greenback only, the color of the business has started to change in recent years.

Recently, we saw that Russian energy companies have started to resort to using the yuan in energy trade with China while Moscow relies on the euro in its oil and natural gas trade with the EU. Putin says that with this practice becoming more common and as the use of local currencies instead of dollars in energy trade gains more ground, a serious blow will be dealt to the dollar, which is the world’s reserve currency.

ERDOĞAN’S CALL TO TRADE WITH LOCAL CURRENCIES

As you may recall, in the pre-pandemic period, President Erdogan used to call for trade in local currencies almost every time he was on a trip abroad. I have repeatedly stressed the importance of this issue. Of course, such a transformation does not happen overnight. It develops over time. However, as a first step, the technical infrastructure must be laid down. This is the mutual duty of the central banks of each country. Central banks must mutually sign an agreement to form the basis for this currency swap. 

In this respect, we can foresee that a period in which central banks of countries, especially those that want to circumvent the side effects of using the dollar by trading with local currencies, will soon be upon us and therefore this step will enable countries to cooperate more effectively.