India-Russia dedollarisation stumbles; UAE to save the day
MENA countries that joined the dedollarisation wave will almost certainly experience similar limitations.
Reportedly, negotiations to dedollarise trade between Russia and India have been suspended due to the failure of both parties to reach an agreement.
Particularly, Russia has complained that it is unable to use rupees to buy Indian goods and services. Hence, it needs to exchange them for another currency first. However, such option is limited in scope due to India's high trade deficit, which reduces the possibilities of trade settlements with third countries.
India's total exports to Russia shrunk 11.6% to $2.8 billion in the first 11 months of the 2022-23 financial year, while imports rose nearly fivefold to $41.56 billion.
India's fear of western direct and secondary sanctions means businesses refrain from trading with Russia in goods and services.
Russia and India have sought to use the UAE dirham to overcome sanctions, but the large volume of rupee reserves that Russia has accumulated limits its convertibility especially as the UAE dirham remains pegged to the dollar and the volume of trade with India insufficient.
The failure of negotiations affirms the strength of western sanctions and highlights how dedollarisation is harder said than done.
The multipolarity of BRICS financial system means issues around compliance, national policy, exchange rate volatility, and exposure to western sanctions strongly restrict members ability to dedollarise partially while relying partly on the western financial system. Hence, dedollarisation can only work if trade in goods and services is also de-westernised. Supply chain reconfiguration will take decades and will require unified action by stakeholders.
MENA countries that joined the dedollarisation wave will almost certainly experience similar limitations. To overcome them, sophisticated sanctions evasion mechanisms need to be established. This will take years and will run through many difficulties. Hence, success might be limited.