REDUCING DEPENDENCY ON THE USD: WHY IS EUROPE SO SLOW?

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Experts: Europe would not benefit from a large-scale removal of the US dollar

Despite all the statements of the Russian officials about an ongoing de-dollarisation, its further extent is under question. Experts have strong doubts that the policy will carry on at a hefty pace. The share of transborder settlements in national currencies is small, as these currencies are volatile and the governments are not prepared to switch to using them. The only alternative is to continue converting export contracts into euros. However, this is not to Europe's benefit on a large scale, as it leads to the strengthening of the European currency and thus affects the cost of export from the EU.

Judging by the latest statements of the Russian officials, the active phase of de-dollarisation is still on. As the Russian leader mentioned recently, one has to think today, “how to protect the [internal] market and prevent the U.S. from using its currency as an instrument of political pressure by diversifying the bank settlements”.

According to Vladimir Putin, 72% of settlements among the countries of the Eurasian Economic Union (EAEU) are made in roubles. “I think that the new reality of the situation must make it to the U.S. ruling circles,” said the Head of Russia. According to Putin, around the world trade settlements in USD are declining. “They used to represent over 50%, they are 45% now,” said the President.

The anti-dollar trend in Russia and around the world does, in fact, continue, experts say. This is evident in particular as the countries keep reducing their reserves in dollars. According to the IMF stats, share of the US dollar in reserves has decreased to the lowest level since 2013: it stands at USD 6.79 trillion or 61.63% of the total reserves. Over the past year alone, the Russian Central Bank has almost halved the share of the dollar in the reserves structure, down to 23.6% as of end of March 2019, compared to 43.7% only a year earlier, while at the same time increasing the share of the yuan, euro and gold.

Countries reduce the share of the US dollars in business contracts. In particular, this applies to Russia's military contracts and exports in general. Gazprom-Neft and Surgutneftegas O&G giants started hedging against potential risks due to the sanctions policy of the USA and introduced changes to export contracts with a possibility of payment in euros. In May 2018, the European Union switched to euro settlements for the O&G products supplied from Iran.

Some of Russia's settlements with its foreign partners, not just those of EAEU, are executed in local currencies, although so far this represents a small share, the economists say. According to experts, while the scale of rejection of the USD in contract settlements will increase, this will happen slower than previously. At the end of 2018, for instance, the share of settlements in the national currencies of Russia and China was less than 17%. Dollar contracts still account for more than 75% of the turnover. So it is not surprising that the anti-dollar policy in Russia does not work in favour of settlements in national currencies, but rather in euros.

A massive drop of dollar in settlements is not to the benefit for Europe, as this creates risks for the European economy itself. A large-scale transition to settlements in euro is not beneficial for Europe itself, experts say. In other words, should Europe abandon settlements in USD on a large scale and pay for its imports with euros, the European currency would get a certain boost for getting stronger. As a consequence, a powerful euro would cut the revenues of the European exporters, as the goods produced in the euro zone would become more costly and thus, less competitive in the external markets, experts observe.