From the Cold War to modern-day politics, Russia’s economy has been a topic of global interest for decades. However, recent reports have revealed that nearly half of Russia’s exports are traded in “toxic” currencies such as the US dollar and euro. What is behind this seemingly counterproductive strategy? In this blog post, we delve into why Russia continues to sell its goods in these currencies and what it could mean for the future of global trade.
The current state of the Russian economy
As of late, the Russian economy has been in a state of free fall. In fact, it is currently in its longest recession since the 1990s. The main culprit behind this economic downturn has been the sharp decline in oil prices. Since oil is Russia’s main export, the drop in global oil prices has had a devastating effect on the country’s economy.
In addition to the plummeting oil prices, another major factor that has contributed to the current state of the Russian economy is Western sanctions. These sanctions were put in place following Russia’s annexation of Crimea in 2014. They have severely limited Russia’s access to international capital markets and have made it difficult for Russian companies to do business with Western firms.
The combination of these two factors has led to a dramatic decrease in Russia’s foreign currency reserves, which have dwindled down to $358 billion from $514 billion just two years ago. This has caused the value of the Russian ruble to plummet, leading to inflation and further economic hardship for Russians.
Despite these challenges, however, there are some signs that the Russian economy may be starting to turn a corner. For one thing, oil prices have begun to rebound somewhat from their lows of recent years. Additionally, Western sanctions are set to be lifted partially later this year, which should help improve access to capital and allow for more economic activity. Only time will tell if these positive developments are enough to pull Russia out of its current economic slump.
Why Russia continues to sell nearly half of its exports in ‘toxic’ currencies
In 2014, Russia sold nearly half of its exports in so-called “toxic” currencies, including the US dollar, the euro, and the British pound. Despite the fact that these currencies are subject to fluctuations in value, Russia continues to rely on them for a majority of its export sales.
There are a number of reasons why Russia continues to sell its exports in toxic currencies. For one, these are the currencies that most of its trading partners use. This means that if Russia were to switch to selling its exports in another currency, it would likely face difficulties in getting its trading partners to accept payment in that currency.
Another reason why Russia sells its exports in toxic currencies is because doing so allows it to avoid having to deal with fluctuations in the value of its own currency, the ruble. If Russia were to price its exports in rubles, it would be at a disadvantage when compared to other countries whose exports are priced in stronger currencies.
Finally, selling exports in toxic currencies gives Russia a degree of protection against sanctions. If a country were to impose sanctions on Russia, they would likely do so by targeting the ruble, making it difficult for Russians to convert their savings into foreign currency. However, if Russian businesses are able to continue selling their products in dollars or euros, they will be less affected by such sanctions.
The ramifications of this economic strategy
The ramifications of this economic strategy are significant. By selling nearly half of its exports in ‘toxic’ currencies, Russia is effectively tying itself to the performance of those economies. If they falter, so does Russia. This strategy also leaves Russia vulnerable to currency fluctuations and other economic disruptions in those countries. Additionally, this approach limits the potential for Russian businesses to expand into new markets and diversify their customer base. Ultimately, this could lead to slower economic growth and reduced competitiveness for Russia in the global marketplace.
What other options does Russia have?
In recent years, Russia has increasingly looked to Asia for economic growth, as Europe and the United States have been mired in stagnation.
Russia’s main export is oil and gas, and it sells nearly half of its exports in U.S. dollars. However, this leaves Russia vulnerable to swings in the value of the dollar. For example, when the value of the dollar falls, Russian exports become more expensive for buyers using other currencies.
To hedge against this risk, Russia has been diversifying its export sales into other currencies, including the Chinese yuan, Japanese yen, and South Korean won. This gives Russia a more stable stream of revenue and helps insulate it from fluctuations in the value of the dollar.
Russia is also looking to increase trade with Asia through initiatives like the Eurasian Economic Union and the Silk Road Economic Belt. These efforts are aimed at boosting economic growth and reducing dependence on Western markets.
Conclusion
Russia’s continued reliance on the dollar, euro and other foreign currencies to do business has been a cause of concern for many. The country is putting itself at a disadvantage by tying its economy to these volatile currencies and missing out on potential gains from national currency appreciation. Furthermore, Russia must also grapple with the issue of sanctions and capital flight due to its use of toxic currencies. Despite this however, it appears that there are still some compelling reasons why Russia continues to sell nearly half of its exports in these ‘toxic’ currencies.
