Blog Post

Something Putin and Juncker appear to agree on – the euro

“It is absurd that Europe pays for 80% of its energy import bill – worth €300 billion a year – in US dollars when only roughly 2% of our energy imports come from the United States,” said President Juncker in his state of the union speech.* Europe’s largest supplier of energy – Russia, who accounts for a third of that bill – couldn’t agree more. Russia’s offer to switch to euros in trade with the EU will likely be costly to implement, but the US switch towards unilateralism is forcing its long-standing partners to question the dollar’s global dominance.

By: Date: September 25, 2018 Topic: European Macroeconomics & Governance

The EU and Russia have strong bilateral trade links: Russia is the EU’s fourth-largest trading partner and the EU is Russia’s biggest. EU-Russia trade has decreased since 2014, as the conflict in Ukraine led to the introduction of EU sanctions on Russia, souring trade and the political relationship.

However, total trade (exports and imports) still stands at an impressive €230 billion per year. Russia remains the largest supplier of natural gas and oil to the EU accounting for 29% of all imports – or roughly €100 billion. The share has remained steady over the last decade.[1]

In recent months President Putin, the Russian government, its parliamentarians and the country’s business representatives have all called for “de-dollarisation”. Russia’s motivation towards de-dollarisation is mostly geopolitical. It comes in response to what Russian authorities see as “weaponisation” of the dollar, increasingly entrenched and open-ended US sanctions, and the threat to Russia’s commitments to Iran posed by the US’ unilateral withdrawal from the Iran nuclear deal.[2]

Would Russia’s offer to switch to euro in trade with the EU come with strings attached? It is doubtful there would be any catch – Russian authorities are keen to narrow political gaps with the EU, a region they see as their most important strategic partner and neighbour. Uncertainty and pressure emanating from the US makes Russian authorities keener to find common ground with the EU, and the euro would be an important symbolic common project.

“As we see, restrictions imposed by the American partners are of an extraterritorial nature. The possibility of switching from the US dollar to the euro in settlements depends on Europe’s stance toward Washington’s position… If our European partners declare their position unequivocally, we could definitely see a way to use the European common currency for financial settlements, proposed Russia’s first deputy prime minister Anton Siluanov at the recent St Petersburg International Economic Forum (Russia Today, May, 2018). As long as there is common understanding and commitment by European partners on wider use of the euro, Russian authorities would be keen to engage.

Significant practical difficulties would need to be addressed, however. First, the vast majority of the trading in oil is still denominated in dollars, while price benchmarks are set on US-based exchanges. Second, liquidity in the euro-rouble currency pair is low. The dollar accounts for 87% of all foreign-exchange trades compared to 31% for euro, and rouble liquidity has fallen sharply since the sanctions took force.[3] Therefore costs would increase due to the introduction of the currency risk into trade contracts. A company or a bank most likely would want to hedge the risk that arises from euro or rouble exposure relative to the dollar-quoted oil benchmarks.

The difficulties might be easier to overcome for gas contracts. Gazprom’s sales to Europe have long relied on long-term contracts with oil-pegged prices and take-or-pay clauses; however, Gazprom has begun using new forms of more flexible contracts, which could present an opportunity should the US introduce sanctions on Gazprom’s operations in Europe – something European politicians so far have condemned.

Despite the difficulties, switching towards euros in trade with Europe is Russia’s most meaningful and realistic opportunity towards de-dollarisation. Russian authorities are considering other options, but there are no quick fixes.

Russia is negotiating with its key trade partners towards increasing the use of national currencies. Only 8% of transactions with China are in renminbi, 22% in roubles and almost 70% in dollars. Russia’s state-controlled bank VTB is the largest market-maker in yuan-rouble and is hopeful the share of transactions will increase.[4]

Russia’s Ministry of Foreign Affairs and the Federal Service for Military-Technical Cooperation would like to see all military contracts in national currencies – starting with Turkey, India and China.[5] Recent secondary US sanctions on Chinese companies that bought military equipment from Russia will likely help speed up the process.[6] Turkey’s President Erdoğan is hopeful that trade with Russia can be settled in national currencies. The Russian Ministry of Finance is ready to offer incentives for non-commodity exporters that switch to transactions in roubles.[7]

Russia has already dramatically reduced its US treasury holdings.[8] According to US treasury data, Russia’s holding appears to be down to $15 billion from $96 billion just two months ago. Unlike other emerging markets that reduced their treasury holdings in order to prop up their own currencies, which had come under depreciation pressure in recent months, Russia’s overall reserves continued to increase and a higher share was allocated to gold and cash holdings.

Reducing reliance on the dollar in government debt and creating domestic-market infrastructure is another key objective. Russia’s total government debt is 14% of GDP; together with its large current-account surplus, balanced budget and growing reserves, it constitutes a big attraction for foreign investors. A share of government debt is denominated in dollars and foreign investor participation in rouble bonds is 26%. Politicians in the US and the UK have suggested putting pressure on the two European clearing houses (Euroclear and Clearstream) to refuse clearing Russian bonds. When Russia issued its first Eurobond post-sanctions, Euroclear at first didn’t agree to clear it. In the most recent Eurobond issue, Russia offered settlement in other currencies (including euro, Swiss franc and sterling) should the dollar be unavailable.

Persuading domestic savers away from (approximately 20%) dollar holdings would take time. The Central Bank of Russia does not stand for any administrative measures to curb domestic use of dollars and stands ready to serve all domestic deposits (about $87 billion) even if access to dollars for the country is suddenly shut off; Central Bank governor Elvira Nabiullina was keen to stress as much during her recent press conference on monetary policy. With reserves at $460 billion, one of the most respected emerging-market central banks can afford to remain calm.[9]

Russia does not see eye to eye with the EU on a wide range of issues too numerous to list. However, the rising unilateralism by the US is encouraging its long-standing partners to question the dollar domination in global markets; here Russian and European interests appear aligned.

 

References

* https://ec.europa.eu/commission/sites/beta-political/files/soteu2018-speech_en_0.pdf

[1]http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113440.pdfhttps://ec.europa.eu/eurostat/statistics-explained/index.php?title=EU_imports_of_energy_products_-_recent_developments

[2]  Joint Comprehensive Plan of Action between Iran and the US, the UK, France, China, Russia, Germany and the European Union.

[3] https://www.bis.org/publ/rpfx16fx.pdf

[4] Izvestia, 14, September, 2018.

[5] https://interaffairs.ru/jauthor/material/2058

[6] https://www.state.gov/r/pa/prs/ps/2018/09/286078.htm

[7] Kommersant, 18 September, 2018.

[8] https://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticsec2.aspx

[9] https://www.cbr.ru/eng/Press/event/?id=2089


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic
 

Blog Post

A world divided: global vaccine trade and production

COVID-19 has reinforced traditional vaccine production patterns, but the global vaccine trade has changed considerably.

By: Lionel Guetta-Jeanrenaud, Niclas Poitiers and Reinhilde Veugelers Topic: Global Economics & Governance Date: July 20, 2021
Read article More by this author
 

Blog Post

The European Union’s carbon border mechanism and the WTO

To avoid any backlash, the European Union should work with other World Trade Organisation members to define basic principles of carbon border adjustment mechanisms.

By: André Sapir Topic: Energy & Climate, Global Economics & Governance Date: July 19, 2021
Read about event More on this topic
 

Upcoming Event

Sep
2
11:15

Towards a new global trade regime: reform of the WTO

Bruegel Annual Meetings, Day 2 - the World Trade Organisation has been going through trying times, a phenomenon amplified by the pandemic. Why are we headed towards a new global trade regime? And what lies ahead for the WTO?

Speakers: Ngozi Okonjo-Iweala and Guntram B. Wolff Topic: Global Economics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
3
09:00

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis, Alicia García-Herrero and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Past Event

Past Event

Strengthening the weak links: future of supply chains

What new supply chains trends will we see in the post-pandemic era?

Speakers: Ebru Özdemir, André Sapir and Guntram B. Wolff Topic: Global Economics & Governance Date: July 7, 2021
Read article Download PDF More on this topic
 

Policy Contribution

Commercialisation contracts: European support for low-carbon technology deployment

To cut the cost of decarbonisation significantly, the best solution would be to provide investors with a predictable carbon price that corresponds to the envisaged decarbonisation pathway.

By: Ben McWilliams and Georg Zachmann Topic: Energy & Climate Date: July 1, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Avoiding a requiem for the WTO

The WTO has been 'missing in action': how can we restore the organisation's role as a global forum for cooperation on trade?

By: The Sound of Economics Topic: Global Economics & Governance Date: June 16, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Belarus: a test for Europe’s foreign policy?

The forced landing of an internal EU flight is just the latest development in the President of Belarus’ efforts to cling to power.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: June 1, 2021
Read article Download PDF
 

External Publication

European Parliament

Digital European Economic Sovereignty? The Case of Semiconductors

Study prepared for the European Parliament's Committee on Foreign Affairs (AFET).

By: Niclas Poitiers, Pauline Weil and Guntram B. Wolff Topic: European Macroeconomics & Governance, European Parliament, Innovation & Competition Policy Date: May 28, 2021
Read article More by this author
 

Parliamentary Testimony

House of Lords

The UK’s security and trade relationship with China

Testimony before the International Relations and Defence Committee at the House of Lords, British Parliament on the UK’s security and trade relationship with China.

By: Alicia García-Herrero Topic: Global Economics & Governance, House of Lords, Testimonies Date: May 27, 2021
Read article More on this topic More by this author
 

Opinion

Will Modi’s push for economic self-reliance succeed?

In its recovery, India will wish to consolidate market access for its export of services to rich countries and make the country’s growing market most attractive to the latest technology.

By: Suman Bery Topic: Global Economics & Governance Date: May 20, 2021
Read about event More on this topic
 

Past Event

Past Event

Global value chain reshuffling: From tight coupling to loose coupling?

As the focus shifts from efficiency to resilience in global supply chains, what does this mean for China?

Speakers: Erik Berglöf, Alicia García-Herrero, Niclas Poitiers and Kristy Tsun-Tzu Hsu Topic: Global Economics & Governance Date: May 11, 2021
Load more posts