The anti-dollar alliance

[abomvubuso]

We've occasionally been hearing about countries wanting to quit the dollar (China, Iran, Venezuela, all part of the Axis of Evil, i.e. countries who don't agree with us). Now Turkey and Russia are conducting serious negotiations about quitting the dollar in their bilateral trade relations. Erdogan personally announced this, saying his country was determined to stop using the dollar as a payment tool in its trade with many countries, and Russia has agreed to start negotiations specifically to that end. Now, whether these are real plans or just some political statements, that remains to be seen. Erdogan has been saying the same thing since 2016 - first he said he wanted Turkey, Russia, China and Iran to use their national currencies in their trade rather than the dollar, so we shouldn't be that surprised when he's rehashing that same subject once more now. Especially after the diplomatic fallout with the US.

As for Russia, they've been "planning" to quit the dollar in trade and in the economy overall for ages. Now because the US sanctions are about to be expanded, that could affect the Russian banks and companies, so it makes sense that they'd be looking for options to move away from the dollar.

So let's suppose Erdogan and Putin, those two buddies, really do agree to start using Turkish lira and Russian rouble for their trade. What would that mean for the Russian companies trading with Turkey? What about the Russian tourists? Well, it's a fact that Turkey is a significant trade partner of Russia. After Germany, it's the second largest market for Gazprom for example, and a major importer of Russian metals and metal products, and second (after Egypt) largest importer of Russian wheat. The Russian metallurgical companies have sold almost 5 billion dollars worth of produce to Turkey last year. If this revenue starts getting calculated in Turkish lira in the future, that would significantly increase Gazprom's currency risk (and that of all its subcontractors and deliverers, respectively). The reason: inflation has reached a record 17.9% in Turkey (unprecedented for the last 16 years). So there's a threat of further devaluation of the Turkish lira, which has lost a staggering 40% of its value within a single year (and has contracted 2.5-fold since 2015).

The question arises, what would the Russian gas companies, metallurgical giants, agricultural producers and other exporters do with the billions of lira that they'd get? Gazprom needs huge amounts of currency to serve its external debt (which is in dollars, euro and Swiss franks). Any exchange of lira into dollars would mean losses. That's why they prefer to trade directly in dollars. Gazprom cannot afford to fund the construction of the Nordstream-2 and Power of Siberia pipelines with lira, and Turk Stream is already almost finished anyway (paid with dollars). Sure, the Russians could try to spend the hypothetical lira revenue by buying the necessary equipment in Turkey, but what would guarantee them the quality they need? And it's very unlikely that anyone in the world would want to buy lira right now. Conversely, when Gazprom is paying in dollars an euro, companies from all over the world are scrambling to get the contract, and this competition has allowed the Russians to pick the most favourable price.

There's one more question. What would happen if the Turkish gas, metal and wheat importers are forced to pay in roubles? Not that it's impossible, but where would Turkey get so many roubles? They'd need to considerably increase the exports for Russia, mostly of agricultural products. But isn't Russia already trying to curb agricultural imports as an effort to stimulate domestic production? Especially of fruits and vegetables. If Russia abruptly increases the food imports from Turkey, that would severely hurt Putin's current policy of replacing imports with local production, and that would cause quite a stir among the Russian rural farmers.

Let's also add the fact that the Turkish banks and producers, especially those who are compelled to pay their debts in foreign currency, wouldn't want to stockpile roubles. It just so happens that the Russian currency is also threatened with devaluation, although it's a tad more stable than the Turkish one.

Quitting the dollar would also affect the tourism industry. Spending the holidays in Turkey would become cheaper for Russian tourists, but the Russian tour operators and the Turkish hotel-keepers would naturally want to raise the prices, especially for next-season pre-bookings, to make sure they're secure against possible devaluations of either currency.

Turns out, the most painless option in the bilateral trade is to actually start dealing in euro. Thanks to the extensive trade with the EU and the large Turkish diaspora in the Eurozone, the Turkish business is already using the European currency quite actively. The euro is not so prevalent in Russia, since their exports of natural resources is entirely in dollars. But they could probably quickly adjust to the euro if needed. However, if such a shift would be beneficial to the EU itself, remains questionable. On one side, it would assert the euro as the second most significant reserve currency in the world; on the other, it could make the euro too expensive relative to the dollar and the other global currencies. And that's agains the interests of the European (mostly German) exporters, and is against the current ECB policy of trying to hold a stable and relatively low exchange rate of the euro.

If the euro becomes more expensive, that would only benefit the US. Trump would definitely be very happy, since it would make the US goods even more competitive, and would decrease the US trade deficit. And isn't that exactly what both Putin and Erdogan don't want to achieve right now?

Comments

[johnny9fingers]

Depends.

IIRC all the European central bank has to do is issue more if the currency is riding too high. Then, awash with Euros, we get to tipping points, and all sorts of interesting scenarios about reserve currencies swapping places come into play. :)

There are all sorts of ways this could go. Most of them with vast potential for amusement. It's a hundred years since the dollar really replaced sterling as the world's reserve currency. I would have given the dollar another two decades clear advantage before all of this started; not so sure now. And I did think some sort of virtual currency would be the thing to supplant the dollar, rather than Chinese or European money.

Just shows how none of us is Nostradamus - not even Nostradamus. Let's see how it all pans out though.