SCO Chooses Dollar

28.08.2009 — Analysis

Russia and its Asian partners in the Shanghai Cooperation Organisation are unable to organise the regional economic cooperation employing own national currencies just with the incantations pronounced by their leaders. The RusBusinessNews observer can testify that the international financial operations between business entities are still carried out exclusively in US dollars.

Almost a year has passes since the beginning of the first manifestations of the worldwide crisis in Russia. All this time the leaders of the country have been tirelessly talking about the "dedollarization" of international payments and in the international trade system altogether. First of all Russia has planned the attack on dollar in the Asian direction joining efforts with the SCO partners - Kazakhstan, China, Kirgizia, Tajikistan, and Uzbekistan, as well as the observer states - India, Iran, Mongolia, and Pakistan.

First steps in this direction have been made during the Summit of heads of the SCO member states in the Urals capital. The declaration signed on 16 June 2009 in Ekaterinburg states, in particular, the need to make more active the global community's cooperation in the sphere of monitoring and management of international finances. "The member states of the Organisation together with the international community intend to make efforts for the formation of a more just, equal, all-embracing and well-regulated international financial regime which takes into account a true balance of interests of all its participants and gives all States equal access to the advantages of globalisation."

Dmitri Medvedev, the President of the RF, stated after the Ekaterinburg SCO summit that the Russian proposal of introducing a unit of account within this organisation, not dissimilar to the European ECU, had found support amongst the organisation members. Moreover, according to Mr Medvedev, the SCO countries should increase the proportion of each other's currencies in mutual settlements which will reduce the dollar dependency and improve the state of the global financial system. National currencies thus strengthened will become more stable which will provide the opportunity of the establishment of alternative instruments for the placement of state reserves of the countries in non-dollar assets; Russia, in particular, will be able to buy securities of its BRIC (Brazil - Russia - India - China) partners.

What is happening in today's reality of financial relationships between Russian companies and their foreign partners in Asia? Is using Russian rouble and national currencies of Asian countries in settlements for commercial products or materials becoming a real means of payment?

Not a single Urals exporter company amongst those surveyed by RusBusinessNews gave affirmative answer to this question. JSC Uralchemmach (Ekaterinburg) specialises in making equipment for chemical, petrochemical, and oil and gas processing industries. The company's press service stated that "according to the information from our finance departments, we had no precedent of a non-dollar transaction with Asian partners".

We received a similar answer from the Federal State Unitary Enterprise Production Association "Ural Optical & Mechanical Plant" that makes military and civil optical systems, geodesic instruments, and medical equipment. The company has a good presence in China (there is their own subsidiary company there) and in Kazakhstan, the transactions are carried out exclusively in US dollars, nevertheless.

OJSC Magnitogorsk Iron and Steel Works (MMK) cooperates in a variety of spheres with partners from Asian countries. Yevgheniy Kovtunov, the MMK's press service manager, told us that his company buys iron ores in Kazakhstan, from the Sokolovsky-Sorbaysky Mining and Processing Complex. "This Mining and Processing Complex is a part of an English holding so we pay dollars for the raw materials. MMK ships metal to China, India, and Uzbekistan for dollars too" he noted.

Representatives of some Urals companies in an informal conversation with the RusBusinessNews observer openly said that the Russian President's drive to use non-dollar transactions in trade with Asian countries is a profanation. One of them, a press secretary of a large metallurgical company found a political component in a purely economic issue: "I don't want to answer this. I would like to see a company, whose representative would make a statement that he is not abiding by Medvedev's wish".

Undoubtedly, practically all currencies of the SCO member countries have significantly lost to the dollar during the crisis. This is not the most important issue, the experts note, as skilful management of currency risks can facilitate the effective trade with devaluing rouble, yuan, or rupee.

The problem is that in order to carry out trade operations in some currency, a currency risk monitoring system must be established so as to prevent possible losses due to the exchange rate fluctuations. The absolute majority of companies in the SCO member countries carries out transactions in no more than three currencies - the national currency for the trade within the country, Euro - for the trade with European partners, and dollars - with the rest of the world. The mentioned MMK, for instance, has trade relations with 60 different countries. If MMK starts carrying out transactions with each of these countries in the national currency, and manage currency risks accordingly, then the company's finance personnel's headache will be 20 times stronger.

"The risks of Russian companies are the following - possible depreciation of income nominated in Asian countries' currencies as the moment of the price being recorded and the goods shipped are distant in time. Domestic companies incur losses when the mentioned risk actually occurs", Oleg Mariyev, Associate Professor of the World Economics Department of the Ural State University told RusBusinessNews. "The benefit of using the reserve currency - dollar - in foreign trade transactions is exactly in the minimisation of the risk of rapid depreciation of the income from an export contract. It is worth mentioning, however, that in recent time the volatility of dollar exchange rate has grown which causes growth of the mentioned risks."

Experts mention that at the moment companies of the SCO member states do not have an established practice of carrying out transactions in anything other than reserve currencies. In this situation it is inexpedient for economic agents to be the brave pioneers becoming the odd ball, the most expedient tactic is to be like everyone else. "This is from where stems the need for the appropriate incentives for companies established on the governmental level, maybe sign intergovernmental agreements on the mutual use of national currencies for the trade between the two countries. At the state level the balance of export and import trade has to be looked at, taking into account the level of the economic development of the partner country when assessing the advantages and costs of the signing of such intergovernmental agreements", reckons Oleg Mariyev.

The SCO member countries differ quite a lot in terms of the level, stability, and prospects of economic development and volumes of the trade balance with Russia. This is why, according to the experts, Russia should work towards the achievement of bilateral agreements on the use of national currencies with Kazakhstan, for instance. Multilateral international treaties in this sphere will be much more difficult to coordinate.

Pavel Kober