Russia’s diamond monopolist Alrosa has started selling its diamonds to foreign customers, settling the deals in rubles, not dollars. The move, reported by Reuters on August 15, is the latest development in Russia’s long-term campaign to end the dollar’s world dominance as the settlement currency for international trade—a goal shared with Russia’s friends China, Turkey and Iran.

Moscow’s fight against the dollar was this week boosted in Ankara where—during a visit from Russian Foreign Minister Sergei Lavrov amid a financial crisis that Turkey claims is the result of an “economic war” being waged by the US and other foreign powers—Turkish Finance and Treasury Minister Berat Albayrak promised measures to reduce companies’ forex risk and said that the dollar, now being deployed as a “political punishment tool”, had lost trustworthiness.

Diamond deals are usually transacted in dollars, but with tensions between Moscow and Washington again on the rise, Russia is moving towards an attempt at abandoning the universal greenback as the currency of international trade.

Russia has already made an attempt at selling crude oil in rubles, using the St Petersburg commodity exchange, but the idea has not caught on with international customers. However, the Kremlin is hoping to have more luck with the smaller and more specialised international diamond trade. In June, Alrosa sold more than 10.8ct of diamonds at an auction in Hong Kong for rubles, BCS Global Markets reported.

The payment went through a branch of Russian state bank VTB in Shanghai. In addition, a long-term buyer of Alrosa diamonds from India paid for a scheduled supply in rubles. “This purely technical and experimental operation should not materially affect the company’s bottom line,” BCS GM said in a note.

Even if the volumes and market are limited, Russia is unlikely give up on the idea of scrapping the dollar in trade as the clash with Washington has increased the urgency of loosening the US hold on international commerce for the Kremlin.

T-bonds dumped
In a precursor to the move away from dollars, the Central Bank of Russia (CBR) dumped a large part of its US Treasury bill holdings in July, briefly causing the price of US bonds to rise as Russia took itself out of the top 30 largest holders of US sovereign debt almost overnight. Russia had cut the share of US Treasury bonds (T-bonds) in its FX/gold reserves to $14.9bn in May 2018, down from $48.7bn in April, and $96bn in March, Reuters reported citing US Treasury data on July 18.

Russian foreign minister Sergei Lavrov said on August 15 that “the dollar’s days as a global trade currency are numbered”. He was speaking at a news conference with his Turkish counterpart.

Turkey, echoing Lavrov’s comments, has agreed with Russia to settle bilateral trade with their national currencies and eschew the dollar. Turkey this week also sold off most of its US T-bills and so like Russia took itself out of the top 30 biggest holders of US debt. Despite being a Nato member, Ankara, like Moscow, has been hit by US sanctions. The sanctions were imposed in the row over Turkey’s detention and prosecution of US pastor Andrew Brunson on espionage and terrorism charges. When Donald Trump last week also doubled tariffs on Turkish steel and aluminium exports, the suspicion was that that was also a response to the Brunson case and perhaps also to Turkey’s refusal to fall in line with US sanctions on neighbour Iran.

The row between Turkey and the US deteriorated as Albayrak made fiery comments including “they’ll lose their arm in an attempt at cutting off our beard”.

Turkey and Iran working on it
Turkey and Iran are already working on settling import and export flows in their respective national currencies rather than the dollar—in fact Iran is now banned from acquiring US banknotes under reimposed American sanctions and some of its lawmakers are pushing for all trade with Turkey, Russia, Iran, India and other markets to be shifted as quickly as possible to non-dollar transactions—and China is on board with the idea of settling trade in national currencies. In 2008, none of the $56.8bn Sino-Russian bilateral trade was settled in local currencies, but last year about a quarter of the $84bn in trade was.

China, locked in a trade war with Washington, has not sold US T-bill holdings, but as the largest holder of US debt, with $1.18 trillion of US bonds, getting out of the bonds would be very challenging. If Beijing started selling aggressively the price of the bonds would collapse, destroying much of the value of China’s sovereign reserves. Collapsing the US bond market would also lead to a full-blown diplomatic crisis that could easily spin out of control. If China becomes minded to exit the US bond market, it will do so slowly and over a long period.