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The Eurasian Intergovernmental Council, the governing body of the Eurasian Economic Union (EAEU) has been meeting at Lake Issyk-Kul in Kyrgyzstan, to coordinate numerous factors concerning the EAEU member states, which include Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia. A major issue has been the development of changes to settle transactions in respective currencies and to dedollarize their economies.

Mikhail Mishustin, a qualified economist also serving as the Prime Minister of Russia, stated that the transactional volumes of EAEU national currencies in mutual international settlements within the EAEU has grown to 75% of the total. According to a representative of the Russian Foreign Ministry, the volume of international settlements in US dollars has been reduced to 21%.

This has been an on-going process, with the EAEU countries moving towards this goal since 2015, when it was decided that strategic goals were the formation of an independent currency area, minimally dependent on the dollar and the euro, the convergence of the monetary policy of the EAEU countries and the reduction of conversion costs for businesses.

According to Mishustin, for the Russian economy, the increase in the share of national currencies in the calculations of the EAEU countries means greater stability of the EAEU financial system.

Other impacts include less exposure to adverse global economic conditions and greater economic security as the dollar and euro have been compromised as a universal payment instrument in international trade.

The Role Of The Ruble In The EAEU

The Russian Ruble accounted for 74% of the total volume of settlements in EAEU currencies, up from 71.5% in 2021. These reasons are logical, because during 2022, Russia found itself under very tough Western sanctions, and foreign currency transactions through the SWIFT system were banned, meaning it was to be expected that Russian authorities would make efforts to normalize foreign trade with other countries using national currencies. This year, the Ruble will continue to dominate in settlements between the EAEU countries, which means that the demand for it will continue.

In coming years, an increase in the share of settlements in “friendly currencies” such as the Chinese Yuan and Indian Rupee will partially replace US Dollars and Euros. In recent weeks, the turnover of Yuan trading on the Moscow Exchange sometimes exceeded the trading volume of the Euro, and sometimes even the US Dollar.

Again, this can be predicted as anormal phenomenon, as this year Russia has sharply turned its trade flows from West to East. Due to sanctions and internal restrictions, the Dollar and the Euro are becoming less popular with ordinary Russians, to be gradually replaced with the Chinese Yuan becoming a popular trading currency in the Russian domestic market, as there is no shortage of liquidity in the Yuan. Given this, it is likely that the Russian Ministry of Finance will soon be able to use the Chinese Yuan to restart the fiscal rule. Should this happen, we should expect a gradual increase in the Yuan exchange rate against the Ruble to the level of 9.5-10 in Q4 2022.

The US Dollar exchange rate in Q3 will be traded in the range of 58-65 rubles, and the Euro will remain in a similar range. But towards the end of the year, exchange rates will be higher than current levels, and it is possible that the US Dollar will rise to the region of 65-75 Rubles.

The current conditions show the real significance of the Ruble. Demand for it is becoming systemic, a factor for the domestic economy. As a result, Russia will get a more manageable and predictable value of the Ruble exchange rate against foreign currencies.

It is also likely that the trend of replacing the Euro and the US Dollar in international settlements with the national currencies of the EAEU partner countries will continue, which in the future may lead to a revision of the entire system.

The Role Of The Yuan In EAEU Trade

The growth of trade volumes in national currencies is a good indicator of working with partners under sanctions, according to Yulia Makarenko, a Director of Russia’s Banking Development Institute, who said “Mutual support of the EAEU countries is a good thing, they are our traditional partners. However, I doubt that the decline in transactions in Dollars and Euros in the EAEU zone will hinder the development of these world currencies. Outside these countries, they will continue to be calculated. Another thing is that rising prices will inevitably lead to a likely reduction in consumption, and hence to a reduction in trade volumes. According to how the situation is developing, the Chinese Yuan has every opportunity to be a leader within the world ranking of currencies.”

Viktor Shakhurin, Director General of IVA TRUST Management Company, has pointed out liquidity issues “The balance in Russia’s mutual trade with the EAEU countries has traditionally been positive, that is, they simply had nowhere to take the missing Rubles to cover the difference, except to buy on the stock exchange. But considering the limited liquidity for the Ruble on local exchanges and on the Moscow exchange, this would force us to buy Rubles at a much higher price. And Russian companies themselves preferred to be paid in the currencies of international trade.”

The imposition of sanctions against Russia and several Russian banks, including the freezing of public funds in banks in Europe and the United States, as well as disconnecting many large Russian banks from SWIFT, made traditional schemes difficult to apply.

“As a result, we had to look for alternative options, the share of settlements in Dollars and Euros decreased, while in national currencies, primarily in Rubles, it increased. However, the problem remains that trade is asymmetric. Considering this, EAEU based companies have to take out loans in Rubles, which is not very profitable now due to its high rate, or buy Rubles for US Dollars and Euros on stock exchanges, which leads to a further strengthening of the Ruble and then reduces the competitiveness of Russian goods and the income of exporters.”

Shakhurin provided a solution though, saying that parallel imports through EAEU and increasing their own exports to Russia can partially remove the problem, while the Dollar and the Euro in international trade can partly be occupied by the Chinese Yuan, but here again the problem of balance arises – for a number of countries in the region, trade with China is currently small, while for Russia, it is surplus. This is one reason China has been keen to develop trade with EAEU nations, to allow EAEU members to obtain additional Yuan. Russia in contrast does not really need them.

However, now the Russian Ministry of Finance has plans to resume foreign exchange interventions on the Moscow Exchange as part of the budget rule, but now not in Dollars or Euros, but in Yuan, will replenish reserve funds, and increase demand for Yuan still more. That will eventually make the purchase of Yuan unprofitable, which is why increases in the use of Kazakhstan, Armenia, Kyrgyzstan, Belarus currencies in mutual trade also need to be phased in.

These settlements could be carried out through the Russian SPFS interbank system and conversion managed through Russian exchanges. This would make it possible to form direct exchange rates of these currencies, not pegged to the dollar, and subsequently introduce a single conventional unit of account within the EAEU and contribute to economic integration within the group.

Sanctions Helped The Dedollarization Process

The growth in the share of national currencies in Russia’s international settlements with other states is a consequence of two situations.

First, over the past years, within the framework of various economic unions (including the EAEU, and a trend within the BRICS), the share of national currencies has gradually increased. This has been a long-standing trend, since for countries this approach strengthens their national currencies.

The second is the sanctions policy of the United States and Europe in relation to Russia. It is now forbidden to import banknotes from these states into the country, and it is simply more convenient and easier for Russia to make payments in other national currencies. In addition, other countries are also interested in this, as they quite reasonably fear that the sanctions policy on the part of developed countries may also lead to restrictions already for them.

This means that we can expect that the share in the calculations of Dollars and Euros within Russia and the Eurasian region will continue to decline, and the share in the Chinese Yuan will grow, as China is the main Asian trade partner, while parallel imports will increase.