IN NATIONAL CURRENCY

The issue of conducting reciprocal settlements in foreign trade operations in national currencies has been on the agenda for several years. There are already first successful and unsuccessful examples of how individual countries and even groups of countries are trying to reduce the dependence of their economies on the US dollar and agree to pay for export-import of goods in their own national currencies.

Similar proposals have been made repeatedly to the government of Azerbaijan as a member of various economic unions and at the bilateral level by large trade partners. Recently, the issue was discussed in Baku at the meeting of the Turkish Trade Minister Ruhsar Pekcan with the ministers of the economic bloc of the Azerbaijani government.

Tempting offer

“Baku and Ankara should seek to sign an agreement on free trade and to liberalise trade, including the conduct of settlements in national currencies. We should not talk about lists of products but about the liberalisation of our trade. To accomplish the task set before us by the presidents of the two countries to bring mutual trade turnover to $15 billion annually, we need to remove mutual obstacles to trade and focus on settlements in local currencies,” Mrs. Pekcan said.

Last year, the volume of trade between Azerbaijan and Turkey decreased by 8%, to $4.2 billion due to the pandemic, as pointed out by the Azerbaijani Minister of Economy Mikayil Jabbarov. The agreement on preferential trade signed between the two countries last year, which introduces a zero customs duty for mutual supplies of goods between Turkey and Azerbaijan, became effective on March 1, 2021. Therefore, it is expected that by the end of this year, it will be possible to enter a positive trend. Also, both governments are determined to bring the mutual trade turnover to $15 billion. This is a rather ambitious goal, which requires additional mechanisms to implement it.  Turkish side proposes to sign a free trade agreement, since "the list of goods covered in the preferential trade agreement is so limited that it does not correspond to the level of relations between the two countries,” impeding the settlements in Turkish Lira and Azerbaijani Manat.

Is it really beneficial to eliminate the need to convert national currencies into US dollars for the growth of foreign trade turnover? Are there associated risks for the national economy?

Precedents

Economists note that the countries have become more interested in the active use of national currencies in foreign trade because of the growing risks associated with the leading world currencies. Thus, the governments hope to reduce the degree of dependence on the conjuncture of the international monetary and financial market in case of the aggravation of the global geopolitical situation.

For example, at the end of March, Russian Foreign Minister Sergei Lavrov said in his interview with Chinese media that it is required to reduce the risks of American sanctions by switching to settlements in national or alternative currencies, and to avoid the use of payment systems controlled by the West.

In general, Russia and China are the key advocates of the movement for national currencies in trade settlements. Back in 2013-2014, heads of these countries announced their decision to increase the share of payments in national currencies in bilateral contracts. In addition, the BRICS countries (Brazil, Russia, India, China, South Africa) in 2011-2012 signed a number of agreements on the mutual use of their national currencies in foreign trade operations. Based on these agreements, settlements between Russia and the BRICS countries in the US dollar decreased by 30% in 2019.

A similar transition to national currencies is also envisaged in bilateral trade and economic relations of the Eurasian Economic Union, which includes Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan. “For example, settlements in national currencies within the EAEU have grown to 74%. We are systematically building up trade in national currencies with China and Turkey,” Vyacheslav Volodin, Chairman of the Russian State Duma, said.

On October 4, 2019, the governments of Russia and Turkey signed an agreement on settlements and payments, which is aimed at expanding and strengthening interbank cooperation, as well as ensuring uninterrupted settlements between the businesses of the two countries.

Russia has repeatedly proposed a similar scheme of trade relations to the government of Azerbaijan. “As to the perspective of using national currencies in mutual trade, there are all the necessary means to implement this mechanism. Institutional environment to conduct such settlements is also available," the then Deputy Minister of Economic Development of the Russian Federation Azer Talibov said.

By the way, some groups of goods are already traded in national currencies, but their share in the total turnover is negligible.

Main obstacles

Meanwhile, most analysts agree that the dependence of the world economy on the US dollar is still very high. Most of the trade and financial settlements are still conducted in the US currency. All export and commodity economies are strongly tied to the US dollar payments. Therefore, it is too early to say that the share of mutual settlements in national currencies will rise to a level that is dangerous for the dominance of the American currency.

Experts identify currency risks, the current market environment and the lack of incentives for using national currencies as the main obstacles to strengthening the role of national currencies. In fact, the degree of attractiveness of the national currency largely depends on the level of development of the national financial market and the corresponding infrastructure, which ensure the normal uninterrupted work of non-residents - participants of foreign economic activities. Too many nuances arise when considering the risks of currency devaluation.

“The system of mutual settlements between the countries has evolved over the years. Therefore, in order to change it and switch to national currencies, we must create certain economic incentives that will accelerate this process. This requires a detailed study of the project and, of course, time,” experts say.

In order to stimulate foreign trade activities using national currencies, different countries of the world provide state support to local exporters, providing them with guarantees and relatively inexpensive loans in national currencies.

In fact, 40% of global settlements and payments are made in dollars through the SWIFT system. If we switch to settlements in less convertible currencies, then the costs can increase, which is simply not profitable for the trading parties. In other words, according to the rules of the game, any steps to avoid the US dollar in economic activities may well harm the national economies.

At the same time, they are already taking more effective steps to bypass all the obstacles to the de-dollarization of their economies and interstate trade. This includes the creation of digital currencies.

Digital transition

According to experts, with the development of digital currencies in different countries, the relevance of the SWIFT system may significantly decrease. Central Bank Digital Currency (CBDC) infrastructure will make digital currency available to commercial banks around the clock, and the cost of transfers, especially cross-border transfers, will be significantly lower.

According to the Bank for International Settlements, more than 50 central banks are working on national digital currencies. Issues associated with the direct integration of these currencies will be resolved within 5-7 years. The most famous commercial CBDC projects today are implemented by the central banks of Japan, Canada, Eurozone, as well as financial institutions in Singapore and Hong Kong. China has already begun large-scale testing of the digital payment system based on Yuan. European Central Bank is working on a mechanism that will make the digital Euro available in the market in a decentralized and anonymous manner, essentially like cash.

Central Bank of Russia also plans to present the concept of the digital Rouble soon, which will be publicly discussed in June, with a prototype to be developed in December.

Turkey plans to start testing of the digital Lira in the second half of 2021. Experts believe that the introduction of the digital Lira will help improve the country's position in front of foreign investors and increase confidence in the national currency. With the introduction of the digital currency, President Recep Tayyip Erdogan intends to create "the most favourable conditions for the institutional sector of the economy and make the country's jurisdiction an attractive financial sector."

Digital money will become a completely legal means of payment, will be converted, circulated and accepted as a medium of exchange in the issuing country. Accordingly, they can be freely used also as a currency of interstate trade.

In Azerbaijan, the development of digital Manat is discussed at the level of media and the expert community. The Central Bank (CBA) has not made special public statements on this matter yet. Although CBA maintains a conservative approach in its monetary policy, it never opposes progressive innovations in the market and their implementation in Azerbaijan. Therefore, we can assume that if the regulator finds the benefits from the transition to digital settlements for the neighbouring countries and Azerbaijan’s trading partners really convincing, the development of the digital Manat may get green light from the government.

In the meantime, all these options, as well as the proposals to switch to national currencies, are in the process of evaluation. It is important to make a decision that will take into account not only and not so much political preferences as the interests of the local business community and the economic development of Azerbaijan.