National Currencies in Mutual Payments within the EAEU: Barriers and Prospects

• Report (in Russian)

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The purpose of this research project is to identify regulatory, institutional, economic, and other restrictions impeding the use of EAEU national currencies in settlements.

The specific weight of the Russian rouble in the foreign exchange structure of payments in the Eurasian Economic Union (EAEU) has increased from 56% to 75% over the recent six years. The dollar’s share has decreased from 35% to 19% over the same time. However, the dollar remains the dominant currency in payments for goods and services between the EAEU member states, excluding Russia. It accounts for 50-80% of payments, depending on their destination. Why are national currencies used to a limited extent only and why do EAEU countries continue to widely use the dollar and the euro in their mutual payments? The report National Currencies in Mutual Payments within the EAEU: Barriers and Prospects answers this question based on a high-level survey.

The survey has confirmed that regulatory and supervisory barriers are not that serious in fact. The main causes that prevent the strengthening of the role of national currencies in payments between the EAEU member states are those of macro- and microeconomic nature. These include higher transactions costs, low liquidity as compared to the dollar, the EAEU currencies’ instability to external shocks, the persistently high inflation expectations, and uncertainties as to the prospects of the Russian economy.

At present, most national financial markets have low capacity and liquidity and, in some instances, lack important segments that are necessary to effectively support the enhancement of the role of national currencies. Out of all countries, Russia, Kazakhstan and Armenia have forward exchange markets that can provide hedging for foreign exchange risks in foreign currency transactions with the EAEU currencies. However, Russia and Armenia’s forward exchange markets lack instruments to hedge risks in foreign currency transactions with the EAEU currencies without the use of a reserve currency as an interim one. Even in Russia’s large forward exchange market US dollar and euro futures make up almost the entire turnover, while there is a total lack of futures and options for the EAEU currencies. Armenia’s very small forward exchange market offers U.S. dollar futures, and transactions with these are rare.

Overcoming these obstacles is possible through the development of the EAEU national economies and integration, improvements in the investment climate, greater division of labour and economic diversification, the creation of transnational corporations to operate in the Eurasian space, the development and fulfilment of joint investment projects, the development of a single financial market, and the preference for small and medium-sized businesses in integration processes. The recommendation is clear, therefore: evolution is better than revolution. Monetary and financial integration should follow the economic base of integration: the elimination of numerous withdrawals and restrictions in mutual turnover, the building of linkages between economic players, as well as political and transport ties between EAEU countries, and the development of common labour and capital markets. Respondents agree that in these conditions any premature promotion of foreign exchange integration will not speed up the development of common markets, but pose additional risks.

The key measures to strengthen the role of EAEU national currencies are, according to the report, the development of the capital market, the availability of loans in national currencies, and joint projects in the real sector and infrastructure. It is also necessary to ensure symmetrical protection of ownership rights and harmonise the work of public authorities and courts in this sphere.

The development of investment cooperation, industrial and technological cooperation, and the fulfilment of joint investment projects in the EAEU play, according to respondents, special role at the current stage. Removing obstacles to investment flows is viewed by respondents as the key integration task. The advancement of small and medium-sized enterprises and cross-border cooperation are also viewed as “growth points” for the use of national currencies.

There is potential to strengthen the role of the EAEU currencies. The authors refer to the survey they conducted: 59% of respondents from businesses and the expert community expect that the role of national currencies in mutual payments will grow and only 17.4% believe that it will decline. This is despite the fact that most respondents think that the effects of the foreign exchange crisis in Russia in late 2014 – early 2015 have not been overcome yet and there is high probability that such crises will occur in the future.

Many respondents noted that the EDB can play a leading role in joint cross-border projects, the promotion of mutual investment, the development of common capital market, and the strengthening of the role of national currencies in mutual payments.