Russia Pushes for More Chinese Currency Swaps to Escape U.S Dollar Dependency

The Russian Central Bank has agreed upon a draft resolution with its Chinese counterpart on a proposed currency swap agreement, allowing the two countries to increase trade in their domestic currencies and reducing the need to rely on the US dollar for bilateral Payments Payments One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonly the basis of exchange involves fiat currency or legal tender, be it in the form of cash, credit or bank transfers, debit, or checks. While typically associated with cash transfers, payments can also be made in anything of perceived value, be it stock or bartering – though this is far more limited today than it has been in the past.The Largest Players in the Payments IndustryFor most individuals, the payments industry is dominated currently by card companies such as Visa or Mastercard, which facilitate the use of credit or debit expenditures. More recently, this industry has seen the rise of Peer-to-Peer (P2P) payments services, which have gained tremendous traction in Europe, the United States, and Asia, among other continents.One of the biggest parameters for payments is timing, which looms as a crucial element for execution. By this metric, consumer demand incentivizes technology that prioritizes the fastest payment execution.This can help explain the preference for debit and credit payments overtaking check or money orders, which in previous decades were much more commonly utilized. A multi-billion-dollar industry, the payments space has seen some of the most innovation and advances in recent years as companies look to push contactless technology with faster execution times. One of the bases of mediums of exchange in the modern world, a payment constitutes the transfer of a legal currency or equivalent from one party in exchange for goods or services to another entity. The payments industry has become a fixture of modern commerce, though the players involved and means of exchange have dramatically shifted over time.In particular, a party making a payment is referred to as a payer, with the payee reflecting the individual or entity receiving the payment. Most commonly the basis of exchange involves fiat currency or legal tender, be it in the form of cash, credit or bank transfers, debit, or checks. While typically associated with cash transfers, payments can also be made in anything of perceived value, be it stock or bartering – though this is far more limited today than it has been in the past.The Largest Players in the Payments IndustryFor most individuals, the payments industry is dominated currently by card companies such as Visa or Mastercard, which facilitate the use of credit or debit expenditures. More recently, this industry has seen the rise of Peer-to-Peer (P2P) payments services, which have gained tremendous traction in Europe, the United States, and Asia, among other continents.One of the biggest parameters for payments is timing, which looms as a crucial element for execution. By this metric, consumer demand incentivizes technology that prioritizes the fastest payment execution.This can help explain the preference for debit and credit payments overtaking check or money orders, which in previous decades were much more commonly utilized. A multi-billion-dollar industry, the payments space has seen some of the most innovation and advances in recent years as companies look to push contactless technology with faster execution times. Read this Term, according to reports coming out of Russia over the weekend. A spokesperson for Russian regulators reportedly said: “The draft document between the Central Bank of Russia and the People’s Bank of China on national currency Swaps Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of SwapsCommon types of swaps include interest rate swaps, commodity swaps, currency swaps, and debt-equity swaps.Interest rate swaps are used to hedge against interest rate risk and involve cash flows exchanged between two parties that are comprised of a notional principal amount. A financial intermediary or a bank is used for swaps but these are dependent upon both party’s comparative advantage.Commodity swaps use the exchange of a floating commodity price, with a predetermined set price for a specific period while crude oil is the most heavily swapped commodity. Meanwhile, currency swaps involve the exchange of principal payments of debt and interest that are denominated in different currencies. An example of a currency swap would be when the U.S. Federal Reserve conducted a swap with central banks of Europe during the 2010 European financial crisis.Used as a way to reallocate capital structure or refinance debt, a debt-equity swap deals with the exchange of debt for equity. For instance, a public traded company would issue bonds for stocks. Swaps are not exchange-traded instruments but rather customized contracts traded in an over-the-counter market between parties. While the swaps industry is primarily used by firms and financial institutions, retail traders have been known to participate although there is always a risk of counterparty’s defaulting on agreed-upon swaps. Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of SwapsCommon types of swaps include interest rate swaps, commodity swaps, currency swaps, and debt-equity swaps.Interest rate swaps are used to hedge against interest rate risk and involve cash flows exchanged between two parties that are comprised of a notional principal amount. A financial intermediary or a bank is used for swaps but these are dependent upon both party’s comparative advantage.Commodity swaps use the exchange of a floating commodity price, with a predetermined set price for a specific period while crude oil is the most heavily swapped commodity. Meanwhile, currency swaps involve the exchange of principal payments of debt and interest that are denominated in different currencies. An example of a currency swap would be when the U.S. Federal Reserve conducted a swap with central banks of Europe during the 2010 European financial crisis.Used as a way to reallocate capital structure or refinance debt, a debt-equity swap deals with the exchange of debt for equity. For instance, a public traded company would issue bonds for stocks. Swaps are not exchange-traded instruments but rather customized contracts traded in an over-the-counter market between parties. While the swaps industry is primarily used by firms and financial institutions, retail traders have been known to participate although there is always a risk of counterparty’s defaulting on agreed-upon swaps. Read this Term has been agreed by the parties. The agreement will stimulate further development of direct trade in yuan and rubles on the domestic foreign exchange markets of Russia and China.”

The Russian Central Bank did not offer any precise details on the size of the planned currency swaps, when the official agreement will be signed nor when it will be implemented. It stated that these details will be dependent on demand. As the swap agreement is still only a draft, some might wonder why the Russians were so pressed to make it public, but the coverage of the draft on Russian media makes it clearer to understand. While the official mouthpieces of the Chinese government report on similar economic developments, such as expanding yuan clearing in Europe, as being small steps to better harmonize international trade, it is left to Chinese academics and think tanks to to set in motion a plan to weaken the position of the U.S dollar as the global reserve currency. On the contrary, in Russia, the official English language state propaganda arm, Russia Today (RT), openly champions the idea of the process to "de-dollarize" the global economy.

The dominance of the American dollar in international trade and finance has come under pressure from other world powers, including from Western countries such as France, who claim it grants undue power to the U.S government to control the world economy and to punish nations and institutes that do not yield. Many think that the international system should be based more on a basket of major currencies including the yen, euro, yuan and others, or that international finance should go back to a gold backed monetary system. The recent U.S originated financial crisis and the continued money printing or "quantitative easing" by the Federal Reserve have only served to strengthened these voices.

Russia has taken an anti-USD stance for quite some time, but recent events have made the Russian position much more resolute. Following a military flare up in the Ukraine that led to a geopolitical crisis with the West, Russia found itself facing economic sanctions aimed at weakening it, and forcing it to make changes in its behaviour. The Russian response was to try and separate itself from the West by developing a parallel system to the international payments system and creating a competitor to the world bank based on the BRICS economies. Russia has also called on firms, especially natural gas and oil companies, to trade more with Asia and particularly China to counterbalance the Western sanctions. While Russia probably plans to create a "multipolar" world with itself as an equal to the European Union or the United States, increased dependence on the yuan, coupled with Western sanctions might lead it to become just an energy-exporting Chinese-dominated country down the road, on par with Africa.