Russian de-Dollarization

Russia, in a snit, is attempting to move away from the U.S. Dollar in favor of Asian financial centers and currencies. The move is a complete non-event for the West. Russia has adopted an adventuresome position versus its Eastern European neighbors, which will generate a prompt financial retaliatory response by the West if Russia continues on this course. If Vladimir Putin would like to see backward Russia become isolated from Western financial markets and become even more backward, he is well on his way. Al Jazeera America reports here:

In the aftermath of the showdown over Ukraine, however, Russia has sought to wean itself off the dollar. Many Russian economists fear that another brash foreign policy venture — like the occupation of the Crimean peninsula — could have disastrous consequences for Russian markets.

In May, Visa and Mastercard nearly closed up shop in Russia after Moscow created a competitor national payment system, a move that was in line with Russia’s brazen dismissal of its need for economic ties with the U.S. But on Monday, Russia’s Central Bank offered Visa and Mastercard a better deal to keep operating in the country, and it now seems unlikely they will exit.

In the absence of a viable alternative, replacing the dollar has proved difficult. Most economists say Russia cannot possibly pursue the wholesale de-dollarization of its economy, which would be risky and costly.

“People use the U.S. dollar for a variety of reasons; most important is that no matter where you are in the world it’s relatively easy to get your hands on it,” said Mark Williams, chief Asian economist for London-based Capital Economics. “So the costs in using the U.S. dollar to settle trade and investment are lower than other currencies.”

Of course, even if Russia was able to avoid trading directly in dollars, it cannot fully isolate itself from the U.S. currency.

“What’s important is not just the currency in which trade is conducted but also the currency composition of Russia’s savings,” said Rachel Ziemba, director of emerging markets at Roubini Economics in London. “Dollars and euros make up the bulk of the Central Bank’s foreign exchange reserves, and Russian corporations borrow more in dollars. So this move to the renminbi would only modestly diversify savings.”