Duck the buck

The Chinese and the Russians have joined forces to launch an assault on U.S. financial hegemony! From China Daily:

China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.

This all signifies… not much. At most, it is a symbolic attempt to lodge a complaint against perceived U.S. mismanagement of the dollar as a global reserve currency.

Remember, hardly anyone is required to use the dollar. They do so because it is convenient. This is true domestically as well as internationally. A pundit could try to barter a column for a latté, with no money involved, but it would require finding just the right politically-curious barista. It’s much easier to use dollars to facilitate exchange.

Globally, there is nothing novel about discovering an exchange rate between the Chinese RMB and the Russian rouble. Once you have each currency’s exchange rate against the dollar, it’s just straightforward division to calculate (known as the cross rate).

The problem for Beijing and Moscow is that if their trade does not balance – and China, at least, has occasionally had a problem with that – someone is left holding a bag of roubles or renminbi. Other than buying Russian goods, there’s only so much one can do with roubles. That’s what sets apart the big global currencies, like the dollar or the euro. Even if you don’t want to shop in New York, you can always go to a Middle Eastern bazaar and buy a few barrels of oil. 

There are perks to issuing a global currency; it’s nice to be able to print money that’s accepted around the world. There are also responsibilities. If the U.S. Federal Reserve prints too much, all those bags of dollars will drop in value. China, sitting atop many of those bags, has been particularly vocal about its concern.

That’s why the Chinese premier is in Russia, issuing joint proclamations, trying to take the dollar down a peg. The Chinese and the Russians may be joining forces, but given the way global finance works, they’re mostly going to end up simply encumbering each other.