On the way to lessen its reliance on the U.S. dollar and distinct from the EU, Russia is getting closer to North Korea. After Russia’s decision to write off North Korea’s debt, the two countries begin denominating bilateral trade in Russian rubles. This is interesting because it is not being conducted in what is considered a “major” global currency, such as the US dollar, Euro, Japanese yen, or British sterling. This important break with the status quo could advance global trade. At the same time, it could make conducting trade for individual businesses much more difficult.
On a global basis, a small pool of strong, internationally recognized anchor currencies makes sense. It reduces the potential for unexpected price fluctuations. This is because the key currencies usually rise and fall within predictable ranges and can be easily transferred or exchanged. This is only a bilateral agreement between Russia and North Korea. However, this concept could have far-reaching implications for trade if more countries decide to have trade agreements based on rubles or renminbi.
On the basis of this agreement, reciprocal trade is expected to rise from USD 112 million in 2013 to USD 500 million in the current year and reach over USD 1 billion by 2020. Still, this is a very paltry sum when compared to US-South Korean trade, which, in the first 8 months of 2014 exceeded USD 75 billion. However, it does have to the potential to shake the foundations of the global order, especially if another large player, such as a BRICS nation, decides to follow suit. Even the smallest BRICS nation, South Africa, conducts USD 64.5 billion in trade with its 5 largest import and export partners.
While it would be a boon for a nation, both economically and as a source of national pride, it would create almost a nightmarish scenario for any business wanting to conduct international trade. Attempting to do business in 5 different countries could result in having to do business in 5 different currencies, some of which have the potential to fluctuate unexpectedly. Unfortunately, this would mean that any business, along with the initial business, would also have to assume the position of being a minor currency speculator in order to protect its income. To do this, a business would need to access, understand, and process a massive amount of information regarding the currency being used as a medium, most of which is not released in English.
Thankfully, it is still too early to tell if this is international trade’s version of “the shot heard around the world” or just another facet of Putin’s Pivot Eastward. But it does present an interesting and thought provoking future for international trade. While we may not need to worry facilitating trade in every currency on the map, it’s never a bad idea in business to be aware of what is happening in local markets with local currencies. After all, local consumers are the heart of every business.
