From Ruble with Love

The Rmb’s internationalization speeds up and goes north-west, headed to Moscow. There, the interbank foreign exchange market of the neighboring countries’ currencies is now possible.
On November 22, the PBOC launched the trade of its currency against the Russian ruble, whose parity was initially fixed at 4.67. This week Russia reciprocated, allowing trade of Rmb at Micex, Moscow Interbank Currency Exchange. Initial transactions were encouraging, even if their absolute value was still modest. But the decision goes beyond its monetary meaning. It actually invades the political milieu.
Since 2005, China handles a controlled exchange regime, based on a basket of different currencies. On their market value, the Government allows a floating range of ± 3%. That was the role of – and the convertibility with – US dollar, euro, Japanese yen, Hong Kong dollar, and the pound sterling. Within this basket something was missing: the emerging markets’ currencies. If China intends to internationalize the Rmb, it cannot rely only on its old competitors. Malaysia was first to enter the scene.
Last August, cross-border trade settlement were allowed in the interbank foreign exchange market between Rmb and Malaysian Ringgit. Now it’s Russia’s turn, with the same floating range of 5%. Again, the agreement reflects the expansion of bilateral trade and investment between the 2 countries. There is no restriction for the Rmb to be traded and the Ruble is even convertible; their direct exchange is thus technically doable. Both currencies have the ambition to reach a regional status. It is impossible for them to replace the dollar as worldwide leader currency. But time might be on their side. Trade between Beijing and Moscow in on the rise. In the first 10 months of 20101, China’s import from Russia grew 22% over the same period of last year. Russia is now China’s 11th supplier. It comes to no surprise to detect the majority of this flow is made of oil and other minerals. Why these exchange are to be paid in dollars? Why the transactions are submitted to the greenback’s volatility? The agreement between China and Russia, if not an answer, is at least a solution