1. What is De-dollarisation
It is the process of replacing US dollar for another currency. Scenarios in which dollar is usually used are:
- Bilateral Trade Agreements
- Buying US dollar for forex reserves
- Trading of commodities such as Oil, Gold, etc.
- Buying assets in dollar
Reasons why dollar enjoys major advantage over other currencies:
- The value of the dollar remains almost intact because of limited inflation and deprecation.
- United states’s financial markets are deep, liquid and open.
- The strength and size of US economy supports the value of the dollar
Russia & China
Russia begain the process of de-dollarisation in 2014, as a fight back against the sanctions imposed by USA over Crimae. By 2019, Russia and China had signed a treaty to use each others national currencies for mutual trading. Because of this treaty there has been a gradual reduction of US dollar in trade from high’s of 90% in 2015 to only 46% so far in 2020.
The US dollar reserve’s have also been reduced significantly by the Russian central bank because of the new round of stringent sanctions placed by the US in April, 2018. Russia accelerated the withdrawal of US government bonds, which they had in reserve. Russian investments fell from $96.1 billion to $48.7 billion in May and then to $14.9 Billion. At the peak in February, 2013 the total investment in US bonds by russia was $163 Billion.
The Russian government insists that the BRICS countries move to using national currencies for mutual trading, to reduce dependency on US dollar. The use of Ruble with India has doubled in a year to become 77.8% of all transactions, as compared to 34.8% seen in 2019. India just being one example.
Going ahead we could see many more countries moving away from use of US dollar in trade and forex reserves, but replacing dollar, will not be easy. As dollar enjoys three major advantages, which were described above, its ability to maintain its value, the size of American domestic economy, and its liquid financial market. There is no other currency which has these three qualities. But in the long run US dollar could face as US is facing a rising debt issue along with aggressive sanction policies being implemented.