Page 19 - bne IntelliNews monthly magazine September 2024

bne September 2024 Companies & Markets I 19
bne:FX
Why Mongolia sticks with dollar over yuan and ruble trade
Antonio Graceffo in Ulaanbaatar
Media from some countries sympathetic to the Kremlin and Beijing are reporting that Mongolia and Russia are now trading in yuan and rubles. These reports, however, are part of a recent uptick in pro-Russia, pro-China and pro-BRICS propaganda that heralds the demise of the American dollar. The truth is, however, that the dollar very much remains the currency of international trade.
While there are increasing examples of countries settling trades in other currencies, many of these trades still have to be cleared through dollars. International trade is almost never priced in currencies other than the dollar in order to minimise the impact of currency-pair fluctuation.
The most prominent example of a country shifting away from the use of dollars in trade would be Russia. Due to strict sanc- tions imposed by the United States and Western nations, Russia has been forced to increasingly use rubles and yuan in trade with China, and is now also increasingly turning to bartering.
Chinese banks, fearing US sanctions, are no longer willing to process dollar trades with Russia. Additionally, Moscow has been forced to cease trading in euros and dollars on its exchanges.
Russia, not surprisingly, is finding it difficult to work out a replacement for the dollar, as most global currencies, such as the rupee, are weaker, less convertible and less stable. Russia and China have urged India to use yuan when trading with Russia, but New Delhi is hesitant because the yuan is only partially convertible.
Russia’s situation demonstrates that countries generally prefer to trade in and hold dollars and will only abandon the dollar when forced to do so. Despite all the talk between Russia, China and BRICS members about de-dollarisation, the dollar still accounts for 58% of all foreign currency reserves, 54% of trade settlement and 88% of all currency pair exchanges.
The dollars counted in foreign currency reserves only account for US dollars and dollar equivalents, such as federal
The trick is in the convertibility. / Manuel Dohmen, cc-by-sa 3.0
Treasury bonds. Dollar equivalents refer to highly liquid and widely accepted dollar-denominated assets that are directly convertible, ensuring stability and ease of transaction.
They do not include US agency bonds, which are issued by government-sponsored enterprises like Fannie Mae and
“Foreign countries hold significant amounts of US agency bonds in their investment portfolios, but these holdings are separate from their official foreign currency reserves”
Freddie Mac. These agency bonds, while low-risk, are not directly backed by the US government and lack the same level of liquidity and universal acceptance as Treasuries. Consequently, they are not considered dollar equivalents.
Foreign countries hold significant amounts of US agency bonds in their investment portfolios, but these holdings are separate from their official foreign currency reserves. Consequently, the total amount of US dollars in foreign reserves is higher.
Additionally, countries hold IMF Special Drawing Rights (SDRs) in their reserves, which are at least 43% composed of US dollars. This further increases the percentage of dollars in reserves, underscoring the world’s reluctance to de-dollarise.
Mongolia is not under sanctions like Russia and, consequently, it generally prefers to conduct trade in US dollars. The country’s biggest exports are commodities, such as coal and metals, which are typically priced and traded in dollars. Therefore, exports are a means of obtaining dollars. The Bank of Mongolia, the central bank, needs these dollars to carry out open market operations and to support the value of the national currency, the tughrik,
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