Can Russia and China succeed in dethroning the dollar? | Counting the Cost

Thanks Hi, I'm Nick Clark, this is Counter Cost on Al Jazeera, we're looking at the world of business and the economy this week. Russia is increasingly turning to China's yuan as its preferred foreign currency and Moscow supports the use of the yuan. Trade with other countries could threaten the US

dollar

. Also this week Ukraine wins the first IMF loan to a country at war. Why did the International Monetary Fund change its rules for lending to the nation and what are the terms and conditions for kyiv and the IMF? has agreed to inject billions of

dollar

s into Sri Lanka's economy, but is it enough to help the island nation pay off its debt and can the government revive economic growth?

Since being locked out of much of the global financial system, Russia has sought alternatives to soften the The impact of Western sanctions has turned to China for an economic lifeline, with trade between the two countries reaching a record $190 billion. dollars last year. Much of those payments were made in Chinese and Russian currencies. The United States' two biggest geopolitical rivals want to counter the dominance of the dollar around the world and Russia is increasingly adopting the yuan even before the war. Russia's Central Bank attempted to reduce the country's dependence on Western currencies, but the invasion further accelerated those efforts.

In the third quarter of 2022, foreign currency in the Russian banking system fell to a record low of 15 percent and in the last year the share of dollar and euro transactions in the Russian market has decreased, while the yuan surpassed to the US dollar as the most traded currency on the Moscow exchange last month with a market share of about 40 percent of trade volume, well, Russia's president is making an effort to get other countries to pay for trade in Chinese currency after his meeting with Chinese President Xi Jinping in Moscow more than a week ago Vladimir Putin said that we support the use of a Chinese one in payments between Russia and countries in Asia, Africa and Latin America the Russian leader also expressed her confidence that such forms of payment will develop between Russian partners and their colleagues in third countries the meeting between her and Putin was aimed at cementing their relations The Limitless partnership that was announced last year and the two leaders agreed to expand their ties economical.

China is already a major buyer of discounted Russian oil and gas. Its imports of Russian coal have increased from 20 million to more than 68 million tons. Russia has also been increasing imports of Chinese goods, including machinery, electronics, basic metals, vehicles, ships and aircraft. The US dollar has dominated global trade and capital flows for decades, but its share of global central bank reserves has fallen to less than 60 percent from about 70 percent 20 years ago. Participation has increased slightly since its launch more than two decades ago, from 18 to just under 20, and while the yuan is widely used, it makes up less than three percent of global monetary reserves and China's attempts to expand the international role of currency have faced obstacles.

Dig deeper into that with our guests now joining us from London: Maximilian Hess, a fellow at the Foreign Policy Research Institute and his political risk consultant. Max, welcome to the show. First of all, in his opinion, how significant is this change, this Russian adoption of wine. thanks for inviting me. I think Russia's embrace of Iran is not really a story about Iran's strength and certainly not a story about how the Yuan immediately replaces or challenges the dollar as the key global reserve and, more importantly, the global trading currency. story about Russia's weakness and the fact that Russia has huge problems trading with the dollar.

What the Western sanctions regime means is that any hard currency that crosses the border physically or digitally into Russia is automatically at a discount compared to that currency abroad. How big is it? key effort by the sanctions authorities and Russia tries to resist it, but because of that Russia has switched to trading in yuan, but even then it still does not represent as large a share in Russian exports as dollar trade is today, 14 months later of the The beginning of this phase of the war, right and Max, what are the risks associated with this, especially given that China's propensity for sudden devaluations is certainly a risk?

The other issue is that there are still capital controls in China and Russia has freedom. You can move the Chinese you want to other currencies. um, it's also a challenge for them. We actually saw this after the Putin and Cheese Summit in Moscow last week. The Kremlin formally asked China to ease its restrictions on B-trade and interchangeability. that it could denominate more of its trade with Africa in the currency and Beijing has so far simply not responded to that request and how widespread the use of the yuan is within Russia Russian citizens and businesses were encouraged to use it until last February The Russian Central Bank changed some of its holdings over the previous eight years since Putin first invaded Ukraine in 2014 to the Yuan, but it had not actually been a major instrument of trade savings or credit financing, as we have seen.

Seen now, Russians. open some savings products in yuan, we have seen that trade obviously with China and, as I said, with some other countries increased substantially, but for me the really key thing is that China has not yet offered Russia long-term financing, not even with the Yuan, then the credit market there is still incredibly underdeveloped and is a tiny sliver of what the dollar credit market in Russia once was. Hey, Max, you were talking about the influence of the Ukraine war and what happened there with the sanctions and so on to do this. This will happen and to what extent this turn will make a difference for the Russian economy.

Well, you know, I think it really puts Russia in a position where it's dependent on China for trade. Russia actually has a trade surplus with China, unlike what you know with the West. countries, but in my opinion the way to think about this is not really from a position of strength, but rather China is happy to say: well, we will accept as much Russian goods as possible, some of which we now get at a discount as a result of the sanctions. on oil in particular, although the discounts are not as large as those on sea-traded Russian oil for the rest of the pipeline oil that arrives, so Russia has essentially become a raw materials supplier state for China .

Chinese exports to Russia, as you know, have increased. a little bit, but the key is that the Putin regime particularly wants materiel, defense supplies and advanced technology hasn't arrived yet, so, you know, I think it's really representative of the power imbalance in that relationship and what about Putin encouraging other countries? In Asia and Africa in America to use the well Guan Putin has actually criticized what he calls the dollar system for the last 20 years and, uh, what is known as the exorbitant privilege of the US dollar is traditionally its ability to go into debt in deficit, but at a reasonable price.

The geopolitical basis also gives the United States significant political strength through the extra territoriality of its sanctions regime and Putin has long opposed this and wants to push away from it, but the ruble is not really a currency. that is attractive to anyone. to serve as an alternative, so he is willing to promote

china

, but this is the rhetoric we have heard from Putin for 20 years and, as you mentioned at the beginning, although the dollar share of global reserves has decreased somewhat in the last 20 years. In fact, it has risen a bit again in recent years and is still by far the key trading currency.

And I am of the opinion that the hegemony of the dollar is not under immediate threat. You know, we have met. in an economic war between the West and Russia and the arming of the West through the dollar system there is much more, much more powerful and it makes it an unbalanced conflict and Putin naturally chafes against that because he wants to assume that order as part of his conflict . In Ukraine, you say, the dollar is not under immediate threat, but perhaps there will be storm clouds in the future. Well, I think you know that China has a 20 or 30 year plan to really replace the dollar or at least put China as the key node. in the global international economic order um, you know, what's very interesting is that, from my point of view, I am very much a Russian specialist by experience, um, Russia has long adapted to these things, um, but the United States has largely been unaware of some of the geopolitical strengths.

The evolution of the dollar and the story of how it became so powerful is really a series of US policy mistakes and unintended effects, while China seems to have a very coordinated and driven long-term strategy, so I don't want to say that It is not a risk, but I think for China it is a long-term effort and my opinion is that one of the problems with this Russian-Chinese imbalance and why we have not seen the credit aspect until now because that is what the most strictly sanctioned by the West is that, for now, China still sees Russia's efforts more as a threat to its agenda than as an opportunity to advance it, something that may change at some point and I think that is a key question around the economic aspects of this global conflict, but for now I think you know that China's strategy is not really to accept Russia as a partner there and more to hesitate, because it has a much longer-term strategy and it is happy with the order that it just wants to be. number one, while Russia effectively wants to undermine it, and as far as China is concerned it is simply to safely conclude its long-term strategy, but what kind of obstacles stand in its way to expand its currency?

Well, you know the capital controls that are still in place in the Chinese yuan are really by far the key until that happens. The Chinese currency will not be seen as an effective means of saving and depositing internationally or for trading because people will not want to. to get caught up in that, you know, even though it's been talked about elsewhere in recent years, we see this every time this geopolitical crisis at the end of the dollar system, you know, there are still very few people domestically who are willing to receive payment. Yuan, while US dollar bills are generally accepted almost everywhere, even from a fish market in Russia to, you know, coaches in Hong Kong, regardless of the level of geopolitical tensions.

Max is great at getting your perspective. I apreciate it. Thank you so much. keep me well Russia turns to China Ukraine asks for international help to keep the country running the economy shrank by about a third last year its budget deficit has risen to $38 billion and to rebuild the war-ravaged nation well that would

cost

billions of dollars more, but it is estimated that less than half of the money promised by the West has reached Kiev. The nation will now receive a loan from the international monetary fund and it is a first for a country at war.

The IMF has agreed to a loan of 15.6 billion. The dollar financing package for Ukraine that is expected to be approved in the coming weeks in the four-year financing agreement is also one of the largest financial packages kyiv has received since last year's Russian invasion. It will help Ukraine close its huge budget deficit and support its bid for membership in the European Union, let's take this, by joining us from Stockholm is the tourbillon. Becca is the director of the Stockholm Institute of Transitional Economics and also a member of the board of directors of the kyiv School of Economics.

The tourbillon is welcome to the show, which is why the IMF has not given loans to countries. at war throughout its history, why change the rules now? Do you think? I think they are extraordinary circumstances. That is a very short answer if we remember that the IMF was created after the Second World War, when we had all the difficulties for the world war back then and this is now the first large-scale war in Europe with these aggressions from Russia to Ukraine, so you know, these are extraordinary circumstances and I think we have to look at them from this perspective, of course, but why this war in particular?

I mean a lot of wars unfortunately over the years, right? So why wouldn't they support those two countries as well? Yes, I think so, I think they are different aspects of this, of course, one is, of course, that the IMF is a political institution in some way we have member countries thatThey need to think about how they want to support countries that are in difficulty and an important ingredient here is, of course, that Ukraine has very strong and powerful friends on the IMF board who control a large part of the IMF Board voting, of course, like the countries of the European Union, the USA, other partner countries that have supported Ukraine now, over the last year, this figure of 15.6 billion dollars, how will it be distributed and how will it be will distribute?

Will everything be managed for reconstruction? No, I mean, there are different sides to this show. The first is, of course, to ensure that the country can meet its economic challenges in the short term. You know, plug the hole. the budget as you mentioned and making sure that Ukraine does not need to print money to finance its large deficits, so this is more of a stabilization of the macroeconomic situation in the short term and then in the future it will also be part of the reconstruction process , but we're not there yet, as you know, yeah, I mean, as long as the war goes on, it's like trying to stop a flood, isn't it?

And ultimately the country needs the war to end to rebuild its economy, yes, absolutely and it needs the continuation. the support of the countries of the European Union and the USA, Canada, Japan, etc., and what do they tell us about the conditions of this financing, well, I mean that all the IMF programs have the idea that countries have fair policies so that they will be able to pay the IMF at some future day and there is always the idea that money should be spent in a way that supports sustainable growth and all kinds of other different dimensions of the economy and this is no exception in that sense.

You know that there will be discussions about the size of budget deficits, how monetary policy is executed and then also institutional reforms linked to the independence or the legal system of the Central Bank, etc., what are the standard things in a program of the Central Bank? IMF, correct standard, but not a standard situation? Ukraine is a country at war, can it fulfill its commitments when it is at war in this way? Well, I mean there's a lot more uncertainty in this program than the standard IMF programs, of course, but I think if we connect back to the idea that this is based on the fact that the major powers that are part of the IMF They are actually accepting this program.

I also think that this is a sign that they will commit their own financing, aid and assistance in different ways to ensure that this is a sustainable IMF program, so basically, what does this mean that I think it is a sign that the EU, The United States and other partners of Ukraine take seriously their commitment to assist Ukraine for as long as necessary. Basically, before we said how much money should have been allocated to The Ukrainian government has fallen short of the projects it was supposed to carry out. There's a lot of corruption. How can we be sure that won't happen here and how should it be combated?

There have been many advances, of course, in terms. When it comes to addressing corruption, many of the different parts of Ukrainian society and external partners focus a lot on corruption, of course, as we know, and this is one of the reasons why these recent corruption scandals have came to the surface. So in a way this is a very good sign that people and institutions are now taking this very seriously in Ukraine. It doesn't mean it will disappear overnight, but it will still be a top priority to monitor and ensure that money will of course not disappear in this way in the future.

One last question for you. Regardless of what happens in the future, do you think Ukraine will receive as much funding for reconstruction and recovery as it received to try to help the wartime economy? Well, I think we're going to need even more support in the future, of course, but there's also the question of Russia paying reparations for the damage this has caused to Ukraine, as most of us have discussed in the past, around Of 300 billion Russian assets are frozen in Western institutions, so you know, that will also be part of the discussion when it comes to financing the reconstruction of Ukraine, but then, of course, private sector investments will also be needed, bilateral donors and everyone else to help with Reconstruction in the future Toby about Becca It's great to have your analysis.

Thank you very much, in fact, thank you. Fuel signals are now a thing of the past. Food shortages have reduced and cooking gas is available again. Sri Lanka's worst economic crisis in decades is showing signs of improving, but the island nation is struggling to find funds to import essential items and pay more than six billion dollars each year until 2029. The government has obtained a rescue of almost three billion dollars from the international monetary fund. The loan comes almost a year after tough negotiations between the IMF. Sri Lanka and its creditors China agreed to support Sri Lanka's debt restructuring, which was crucial in securing the package that followed similar deals from other creditors, including India and Japan.

The government also imposed unpopular measures to meet IMF requirements, including raising taxes, utility prices and cutting subsidies on fuel and electricity. Joining us from Colombo in Sri Lanka is ciao Dam, the singer, He's the head of macroeconomic and thematic research product at Frontier, welcome to the show, so this deal is almost three billion dollars, but it allows for another seven billion dollars, how useful is that? this will be for Sri Lanka for the deal itself, especially the money that comes alone, the money that comes alone right now, in itself, is not something that is going to change the rules of the game, which changes the rules of the game and has the potential to change. the future for Sri Lanka is that this is essentially the next place in the overall economic restructuring of the country, the overall economic path of the country, so this allows Sri Lanka to move forward on some additional reforms, it allows Sri Lanka to partner with others developing countries.

Departments of the World Bank, the ADP, for you, finances some of those reforms and moves forward and also allows us to move forward with the debt restructuring part, so starting that process is what really crystallizes the beginning of the Ira program and, Of course, there is a long road ahead. but the long road can now begin now that we enter the bank, so we should look more at the medium and long term as far as this is concerned, I mean the part of the factors or the necessary reforms, the economic policy measures . We need to take ourselves to the medium and long term, we really have to start now, of course, but this allows us to start the processes and more, yes, I was going to say because the conditions mean that we have to act now to have the loan in the first moment. place so immediately will help shore up the economy, so in the last, let's say, six months or so, a lot of the foreign shortage in the country really started to go away and allowed us to start clearing it up primarily as a result of the economy tightening. really reduce demand, that has meant that a significant amount of that foreign stuff already looks a lot better.

This now allows us, for example, to know the reforms that are required for the state or the reforms of companies that are required on the energy side. maybe move forward with that, so yes, this is a very critical part of moving forward, but of course it's just a first step in the stage where the country has gone through a lot of austerity, this is how you do it with this guy of things. of agreements that must be passed through more austerity, can the country face that? we will see more protests it is not the packaging itself that requires austerity about the fact that the Sri Lankan economy had reached a very unsustainable level and then from that point If you want to recover, you must forget about the crime of tithing, you must reverse some of those unsustainable policies and adopted them in a very consumer-driven way, tightening those that actually end up there being Australia, so move on.

What Sri Lanka has done currently is exaggerate taxes, especially for progressives and high income earners, of course there is progress on that. There are applications for how that could be changed in the future, so there will be opposition to some of these reforms, esp. those who are directly affected, but in terms of what directly affects, for example, the majority of the country, I think one thing that helps is the fact that there is actually a minimum expenditure required in the IMF program for welfare social, so this government is required to spend the minimum percentage of GDP on social media, but of course what really hurts is the fact that electricity and fuel subsidies have been removed and made for terrorists to reflect the

cost

s, there was probably no other option than that.

Due to the absolutely terrible situation in both of them, the alternative could have been much worse, but just because that is the case doesn't mean the pain is there, so some of it recently remains. Prices have to come down and the currency is starting to see some strength along with the drop in global oil prices, so hopefully that kind of action can help mitigate some of the pain that especially the poor are suffering. In the short term there is a need to increase exports, how does the government plan to do that? So I mean Sri Lanka has always wanted to increase exports and they've had different different strategies different plans um for me from my perspective I think it's about getting uh. remove any barriers and create an environment that is more conducive to expanding export services, so structural reforms would appear to improve or eliminate regulation or overregulation and therefore allow currencies. particularly to reflect market conditions would also be quite an important part of the Sri Lankan economy.

It has traditional traditions over the last 15 20 years that have maintained currency control that has served as an incentive for exports, so the general change of these factors could help and create a better environment to give examples, but only time will tell how much impact this has had. Businesses have really suffered in recent years, especially in the last year, and the poor have too. Will money be directed in that direction, especially to the poor? On that side, I think, as I said, a minimum thread is required for welfare and that is expected to ultimately nominally in Ruby terms mean and increase the amount of welfare that is spent in the country.

We are also seeing some of the factors that led to the deepest contraction that Sri Lanka has actually seen in a long time reverse, so interest rates are starting to fall in Sri Lanka, the currency is also experiencing some trading, as I said, so hopefully these factors just mean that both directly in terms for example where investment, but indirectly in terms of the overall economic environment, it improves only to create a situation where Sri Lankans feel less pain and pay less, be more informed and move forward, how would you see the Sri Lankan economy in a couple of years?

Several years from now, as long as Sri Lanka cannot stick to this general reform trajectory, I think there is reason for a lot of optimism among those who are cautious about it, because having to stick to the reform agenda is the most difficult part because Traditionally, the economy The country's policy has not lent itself to following this type of path, but, of course, the fact that Sri Lanka is starting this time from a very, very deep contraction, leaves no real physical, monetary or financial space to reverse it because it was previously could reverse and wait three years for the impacts to be felt politically now, if it reverses the impacts will be felt immediately within the next month or so, hopefully that will prevent a reversal on the Sri Lankan side, but on that basis I am optimistic, but cautiously optimistic. about what the future of the country may be, thank you, so we have our program for this week.

If you want to comment on something you've seen, you can tweet me at Nick Clark Al Jaz. Use the hashtag ajctc or simply send us a message. an email with the cost at zero.net is our address, but there's plenty more for you online at target.com forward slash CTC that will take you directly to our page, including links to individual reports and full episodes so you can get up to date. That's all for this edition of Count to the Cost. I'm Nick Clark of the whole team. Thank you for joining us for news on Al Jazeera.