Political Rivalry Leads To US Dollar Reserve Currency Replacement Idea Being Raised Again

It's an idea that has been raised from time to time in the past. The last time that I recall it was suggested was following the 2008 financial crisis.

The idea is to use other currencies instead of the US dollar for the purchase/sale of diamonds – as well as a wide range of internationally traded commodities. Russia's ALROSA, the world's leading rough diamond miner by volume, announced that it has tested a payment mechanism with foreign clients using the Russian currency, the ruble.

Transactions were conducted with clients from China and India, it reported. If necessary, the company said, it is ready to use a ruble payment scheme in the future.

The miner said that its Chinese client paid for goods purchased at an auction of special-size rough diamonds (+10.8 carats) held by ALROSA in Hong Kong in June. By agreement with the winner of one of the lots, the contract provided for the payment in Russian rubles instead of US dollars. Payment was made through the VTB bank branch in Shanghai.                                        

Meanwhile, a long-term ALROSA client from India paid for one of the scheduled diamond supplies under the contract in Russian rubles. In this case, the buyer transferred the amount in rubles from his account in another Russian bank.

According to Evgeny Agureev, Director of USO ALROSA, payment via foreign branches of Russian banks makes it possible to speed-up and simplify the payment process, as there is no more need to use correspondent accounts with other banks. "The practice in the international rough diamond market provides for settlements in US dollars between sellers and buyers of rough diamonds. We have tested an alternative payment scheme to understand the possibility of its implementation and nuances to be taken into consideration. The experience is positive, so we will apply it on an as-needed basis," he said.

Interestingly, he noted that ALROSA's Supervisory Board instructed the company's management to consider the possibility of ruble payment for rough diamond sales. Since business and government are closely related in Russia and ALROSA's top people are all closely connected with government and former officials, one can safely say that this idea is no coincidence.

On Tuesday, Russian Foreign Minister Sergei Lavrov proposed that countries facing US sanctions, such as Iran, Turkey and Russia, may start doing business in their national currencies, and suggested that the reign of the US dollar as the international reserve currency may be numbered. To suggest that this is entering the sphere of fantasy land may sound a little harsh, though it is accurate.

For obvious reasons, the US dollar has long held sway as the currency of international trading, and that leads to a huge amount of resentment among the United States' economic and political rivals. With the weakness of the economies of Turkey and Iran – especially right now – as well as Russia, the idea that they can somehow topple the mighty greenback is particularly ridiculous. Turkey's lira has crashed by 45% this year, Iran's rial has halved in value in less than a year and the ruble is down 15% so far this year against the dollar. With volatility being the bugbear of the markets and business, the idea that companies are likely to want to acquire or hold the declining lira, rial or rubles for payment is pie-in-the-sky territory. Similarly, the idea that they would prefer to receive their own currency rather than hard foreign currency earnings – especially at a time when the value of the dollar is rising – is a fiction.

Those country's leaders should head for the backstreets of their towns and cities and see how many of their citizens are desperately trying to put together enough of their national currencies to buy some dollar bills in order to preserve the value of their savings. They are living a reality with which their political leaders are totally unfamiliar.

The United States remains by far the world's most powerful economy and its financial sanctions have such clout that international businesses – and especially banks – have no interest whatsoever in flouting them. The idea that this is a time to start playing with the notion of using declining currencies for international trade smacks of a kind of childish desperation.