Recent U.S. sanctions against Russia for, among other things, its actions in the Ukraine, have led President Putin to attempt to downplay the role of the dollar in the domestic Russian economy. While on the surface it may not seem significant that the Treasury Department announced sanctions against two individuals and one entity for “serious human rights abuses” and sanctions on another eight entities and one individual responsible for advancing Russian interests in Crimea.
However, the Russian response in attempting to modify its use of the dollar in favor of the ruble or other currencies shows concern. Tightening the financial noose on Russia is really not that difficult. For having the world’s largest land mass, the Russian economy is out-gunned by the state of Texas alone.
There are several ways Russia can go about demoting the use of the dollar. Its central bank, like the Fed, can sell U.S. Treasuries, as well as build up its gold reserves. The Russian government can also issue tax incentives to domestic corporations to transact foreign trade deals in rubles. Putin and the Kremlin exude disdain for the sanctions and are using this as a means of strengthening ties to China.
Even Moscow realizes the futility in an attempt at an all-out dollar dis. The dollar is involved in nine out of every 10 transactions in the daily $5 trillion foreign-exchange market and the majority of global debt is in dollars. The ruble itself will be utterly disregarded by the financial markets, as it has shown to be unstable in recent periods. The level of corruption and lack of transparency also brings Russia down on the financial scale. Last year, it ranked 135 out of 180 countries on Transparency International’s Corruption Perceptions Index (CPI). In addition, Russia is heavily dependent upon dollar denominated commodities such as oil, gas and steel.
The propaganda machine that is the world media works 24/7 to undermine the influence of the United States and the dollar. Vailed attempts have been made by the likes of China, who created a yuan-based oil derivative, as well as the European Union, who have discussed setting up a new payment system independent of the U.S. Good luck with that. Then there are the fringe players such as Iran, Venezuela and Pakistan, who try to limit the role of the dollar. Good luck with that as well.
The U.S. has not done itself any favors in bolstering the dollar by continued trade spats. The bottom line for a central currency is stability, and any time that wains, other economies will attempt to fill the void and create that which is their best interests. In addition, the ever-looming budget deficit, which currently stands at some $21 trillion, or $174,000 for each taxpayer, forebodes future instability. Interest on this behemoth debt has surpassed military expenditures, which is one of the top line budget expense items.
According to Jason Bush, senior analyst at Eurasia consultancy, “Though Russia’s non-dollar trade is poised to grow, businesses will be reluctant to incur greater costs than competitors who are using the dollar. Again, as one might assume, the motive is ultimately political. Such initiates would have to be limited in the long term, as 40 percent of Russia’s revenues are dollar based.