Is trade possible bypassing US dollar for exchange rate?

If we take an example of trade in local currency, of the trade between India and Iran, Indian rupee exchange rate is worked out at 554.31 Iranian rial. This reference rate has been worked out on US dollar-Iranian rial exchange rate of 42,300 rial and US dollar-Indian rupee exchange rate of 76.31. So, the reference rate remains the US dollar. The gold-based exchange rate, which aims to bypass the US dollar, is not tested as of now.

Having an alternate mechanism for trade has been on the agenda of BRICS (Brazil, Russia, India, China, South Africa) for long, and has no relation to the current Russia-Ukraine crisis. But the issue became relevant again with the imposition of US sanctions on Russia in the wake of Russian attack on Ukraine.

The common payment system among the BRICS countries and the trade mechanism in local currency were discussed in talks between Indian Prime Minister Narendra Modi and Russian Foreign Minister Sergey Lavrov, who visited India some time back. Both the common payment system and trade mechanism in local currency are more diplomatically debatable points but the exchange rate is most important issue for exporters and importers.

In the current system, the exchange rate of various currencies of the exporting and importing countries is calculated based on US dollar. But a mechanism of exchange rate between India and Russia cannot be worked out easily because the value of the Russian ruble against the US dollar has depreciated drastically due to the war, while the Indian rupee is mostly steady against the dollar. Russian ruble has fallen from 70-75 to 110 against the US dollar in recent weeks, while Indian rupee has remained in the range of 72-76 against dollar.

According to an expert from forex market, as a net importer country, India will gain from the steep fall of ruble as its value has come down from ₹1.05 to just 77 paise. But it may hurt Indian exporters from weakness of ruble or they will not be able to take orders. Experts believe that the only way would be for the government to make a system to compensate exporters.

The exchange rate between rupee and other BRICS currencies is still critical issue if US dollar is not referred. In this scenario, Putin has indicated that the exchange rate between the currencies could be decided on the basis of gold. According to him, Western countries are depositing gold in Russia to buy ruble from which they can make payments for import of crude oil and gas. Putin has backed ruble with gold so free fall can be checked. The value of one gram of gold in Russia is about 5000 ruble.

Viresh Hiremath, Forex Analyst and Director of Finlit Consulting Private Limited told Fibre2Fashion, “Today 99 per cent of international trade in the world takes place either in US dollars or at least the dollar is referred for exchange rate to execute global trade. However, geo-political tensions after Ukraine crisis has challenged the dominance of dollar as global currency.” Exchange rates of currencies were worked out on the basis of gold until 1935. But US dollar became global currency after that, he added.

But experts said that gold price is also influenced by the dollar. Gold price in Russia or any other country will be influenced by volatility in the international market because most countries are net importers of gold, and some countries may have more dependence on global supplies. Therefore, the price of gold in the world market is directly related to the dollar. Hiremath said that it is not possible to avoid the effect of dollar in currency exchange rate in the current scenario. However, gold price may be the most practical way to determine the exchange rate for trading by avoiding the US dollar.

Fibre2Fashion News Desk (KUL)