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Currency Wars Along the Silk Road
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Currency Wars Along the Silk Road

 
 

The rise of the Chinese yuan (renminbi or RMB) as a potential international reference currency has combined with the rising influence of lending institutions such as the Asian Infrastructure Investment Bank to magnify the importance of the role of national currencies throughout the Central Asian states. As never before, the competition among the national currencies and even consideration of the adoption of alternative currencies is reflecting geopolitical rivalry rather than conventional monetary policy. The rivalry is shifting in various directions, but it is unlikely that it will simply end in a standoff. Important changes in both the financial realm and the geopolitical terrain in Central Asia seem inevitable.

Central Asian states along the fabled Silk Road adopted their current national currencies following their withdrawal from the Soviet-era ruble zone shortly after the disintegration of the USSR. When first established as independent currencies, Kazakhstan’s tenge, Kyrgyzstan’s som, Tajikistan’s somoni, Turkmenistan’s manat, and Uzbekistan’s som were linked, with various degrees of flexibility, to international currencies in ways that made the national fiscal policies of the Central Asian states heavily dependent on global market forces over which they had little control. Given this dependence on volatile export earnings from primary commodity exports, Central Asian states over the past two decades endured painful cycles of run-away inflation and convulsive currency devaluations.

The most economically successful Central Asian state, Kazakhstan, made great strides forward in economic development but it was itself heavily dependent on revenues derived from petroleum and other commodity exports. Prices for primary commodities tend to be more volatile than prices for industrial goods, thereby leaving all primary commodity exporters in a dependent position, subject to market movements and international financial practices outside their control.

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Kazakhstan’s President Nursultan Nazarbayev has thus emerged as an outspoken critic of the international financial system and the volatility Kazakhstan experienced. Since the founding of the Astana Economic Forum in 2008, Nazarbayev has called for fair international financial relations, appealing for the establishment of a stable and reliable international currency. As Nazarbayev reiterated at the Astana Economic Forum in 2017, “It’s time to consider the introduction of the global payment unit. This will save the world from currency wars, speculation, avoid distortions in trade relations, and reduce volatility in the markets.” Such a new currency unit, Nazarbayev suggested, might be managed through a consortium of national central banks under the auspices of the United Nations. Auspiciously, Nazarbayev also proposed the new currency could be administered in the form of a cryptocurrency, using distributed ledger technology such as the Blockchain first introduced by Bitcoin.

Nazarbayev’s appeal to adopt a new international currency unit is more subtle than it appears on the surface. Nazarbayev concurs with those who criticize the role of the U.S. dollar as the de facto global reference currency, yet he aims beyond those who favor simply displacing the U.S. dollar with an alternative such as a “pooled” national currency as represented by the International Monetary Fund’s “Special Drawing Rights” (SDR). Nazarbayev also goes beyond those who favor an alternative to the U.S. dollar in the form of adopting another national currency as the new standard, such as the yuan, or a bi-nationally administered yuan-ruble amalgam, anchored by the value of gold.

A return to the gold standard as a currency has been long been a major objective of Russian President Vladimir Putin. Russia is one of the world’s leading producers of gold (along with China, the world’s leading gold producer) and, for that matter alone, a gold-based currency standard would be more beneficial to Russia than it would be to other non-producing countries. But the driving factor in Putin’s efforts to lead the world toward a new currency is at least as much a geopolitical policy as a monetary policy. Putin has long sought to displace the role of the U.S. dollar and advance Russian geopolitical interests.

More recently, Putin has sought to partner with China in creating a new standard for international financial transactions. While Putin’s strategy is essentially geostrategic, Chinese officials are primarily concerned with advancing China’s long-term commercial objectives through promoting the yuan as the leading international currency. Over the past decade Chinese officials have moved cautiously and incrementally toward a greater role for the yuan by creating new mechanisms for the correction of disequilibria and for limited channels for yuan convertibility through experiments in “offshore” foreign exchange trade windows.

Chinese officials are now making steps toward the development of a new platform to provide gold-based stability for the yuan. At present, gold bullion exports from China are prohibited while imports are booming. Chinese authorities are working toward establishing a gold-based yuan market by stacking gold reserve capacity. Officials reason the fungible gold reserves could be used to back the yuan by making possible settlement of accounts between central banks. Currently, given the very large number of yuan in circulation, the gambit to shift global practice toward reliance on the yuan for the settlement of international accounts and the denomination is not stable. Pegging the price of yuan to gold reserves would be a major step toward securing the value of the yuan, although the People’s Bank of China, China’s central bank, would need to have the capacity to intervene to prevent the price from fluctuating too widely.

This gold-based gambit is not without risks. If the establishment of a gold-based yuan is successful, it can constrain yuan inflation and displace the U.S. dollar. That is the upside for the Chinese. On the downside, it would likely force the price of gold dramatically upward and devalue the U.S. dollar. This would depress American demand for China’s exports, reducing China’s revenue. Also, it would diminish the value of China central bank holdings in U.S. treasuries, the largest in the world — thereby damaging China. At the same time it would increase the value of current U.S. gold reserves holdings, also the largest in the world — benefiting the United States.

The way the yuan gambit plays out is of critical importance to all the Central Asian states. But Kazakhstan’s endorsement of a UN-managed currency, rather than the gold-based yuan alternative, echoes the reservations of monetary authorities in all the Central Asian countries. Reliance on a foreign national currency managed jointly by China and Russia but subject to the fiscal control of Chinese and Russian political officials is not likely to lead to more monetary autonomy for the Central Asian countries. Russian and Chinese central bank officials report directly to political officials. If the yuan becomes a major reference currency there will likely be tremendous pressure for political officials to address fiscal problems, when they emerge, by flexing control over monetary policy.

At present the de facto role of the U.S. dollar means that countries around the world rely to a certain extent on American monetary policy but that is separate from American fiscal policy. The U.S. dollar is a national currency managed by the Federal Reserve Board, which operates on guidance from the Open Market Committee rather than U.S. political officials. U.S. political officials do not have constitutional authority to simply order the Federal Reserve to “print money” or cover a fiscal deficit through manipulating monetary policy. The stability of the U.S. dollar over many years is basically a consequence of this constitutional separation of the political and economic decision-making. Separation between fiscal and monetary policies is very rare among other countries in the world.

Reservations within the Central Asian countries about the ascendance of the yuan as a reference currency also explain why Uzbek officials are currently in the process of entering the conventional foreign exchange market under the guidance of the International Monetary Fund. Uzbek officials are anticipating that relying on the stability of the current supra-national financial arrangements based on the SDRs is preferable to proactively endorsing the yuan.

The wild card in the rivalry among currency arrangements is surely the new so-called cryptocurrencies. Bitcoin, the first and most well-known digital currency, has been in existence less than a decade and has exhibited extreme volatility, experiencing nadirs as low as $3 and peaks as high as $3,000. Such a currency cannot be endorsed as a standard by public officials of any country. At the same time, the potential of digital currencies cannot be ignored. Digital currencies and the idea of a non-centralized digital ledger that operates independent of any particular state have attracted the attention of many private investors. Distributed ledger technology is likely to soon be playing a major role in the future calculations of all the major players in the international financial community, including the private commercial banking sector and the public international financial institutions.

Russian and Chinese financial authorities have imposed strict oversight over digital currencies. But political officials no longer dismiss the technology as being unimportant, as suggested by Vladimir Putin’s recent meeting with the creator of Bitcoin’s closest competitor, Ethereum, and by Nazarbayev’s recognition that the new international currency, whatever its form, should take into account digital technology.

Gregory Gleason is Professor of Security Studies at the George C. Marshall European Center for Security Studies and Professor Emeritus at the University of New Mexico.

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