General objectives that guide the activities and relationships of one state in its interactions with other states.

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Russia and China are Killing US Dollar

in China/Donald Trump/News/Russia/U.S. by

According to Russian Foreign Minister Sergei Lavrov, countries which are under the sanctions should start doing business in their national currencies, as he suggested on Tuesday. Other than Russia, countries which can opt for such a move are also Iran and Turkey, and this means that the days of the US dollar as the international reserve currency could come to an end.

The person who will be the happiest about it is President Donald Trump. Why Trump?

Yale economist Robert Triffin explained in the 1950s that when a currency is the international reserve currency, it runs a current account deficit. In case of a replacement, it is more likely to have trade surpluses, which is what happened when the US dollar replaced the British pound in the 1920s and which is what POTUS aims for.

Currently, all over the world, nations use the dollar as the currency to trade with each other. When purchases oil from Iran, they use the US dollar to complete the transaction. Basically, more US$ flow out of the country than it flows in and that creates a big current account deficit.

With the dollar as the international reserve currency, we have a thing called “monetary seignorage.” In other words, it is what the US government earns with all of those dollars circulating around the world, outside of the US. It is a minimum cost to print money whereas countries which use $ such as China and Russia pay the full value of it in goods and services.

But not everyone wants to see the dollar as the world’s currency. As China claims, the international role of the US dollar was one of the things that caused the financial crisis ten years ago. There was a chance back then for another currency to replace it, but none did.

Let’s jump to the present. Last week, Trump reimposed sanctions on Iran and he said that any company which is doing deals with the Iranians in dollars would also be hit by sanctions. Also under sanctions are several Russian companies.

Lavrov visited Turkey and he told at the press conference that “unilateral enforcement measures are illegitimate in international affairs,” which is a clear reference to the sanctions imposed by the USA. “One way to counter these illegitimate barriers and restrictions is we can use national currencies on our bilateral trade,” he concluded.

image source: america.aljazeera.com

According to Lavrov, Russia has already switched to local currencies when they strike trade deals with countries such as China and Iran. He also believes that a large number of other countries will start doing the same. “I strongly believe that abuse of the role the U.S. dollar plays as an international currency will eventually result in its role being undermined,” Lavrov said. “A growing number of countries — even those not affected by US sanctions — will more and more stay away from the dollar and will rely on more reliable partners using their (own) currency.”

To some extent, Lavrov is right. But will the Chinese be content when they receive the payment in Turkish lira, knowing that the currency will be worth much less by the time the ship reaches its destination? What the US dollar has that no other currency can guaranty: It is safe, dependable and easy to exchange.

We mentioned that this change in role for the US$ is making Trump happy. While he may be thrilled with lower trade deficits because the dollar loses its role of being the international reserve currency, this is not going to happen soon. We will still have to wait for a major change when it comes to the international currency and at the moment none can replace the US dollar.



As one of the founders of foreignpolicyi.org Knjaz Milos tries to bring all the latest news regarding politics. He loves history and is passionate about writing. contact: carsoidoffice[at]gmail.com

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