Reviews & Comments

"It’s not about the settlement system..."

Author: Aleksey Droszhilov, IFC Treasury International Finance Corporation IFC/World Bank Portfolio Manager, advisor of the Russian Federation Central Bank.

I’ve got a dual impression from this study. On the one hand, there are no doubts of its statistical and sociological nature. A very good job has been done; a large number of opinions have been gathered and its interpretation is given. But on the other hand, I’ve noticed one moot point in the Report. It’s more about future debates. I mean the conclusions of the UN on the motion in direction of the regional settlement currencies. And the question here is not that this topic is being discussed, but the fact that the Report describes it as a fait accompli.
I assume, claiming this as fact is wrong. First of all, because of the extreme inertia of this system. Second, creation of reserves is itself a kind of comes after calculation, and calculations are not being transferred by anyone so far. And the third and, probably, the most important, are two things that are frightening in a methodological way: currency fluctuation and the negative factors influencing the currency as a means of payments, reserves and savings.

It doesn’t matter at all whether the currency is expensive or cheap. I would say the main issue here is a legal one. In other words, how well the property rights are employed in the country; how efficient the financial system is; how easy calculations are, and how reliable are the certain countries’ state guaranties that, in a dispute, one could get legal protection and would be able to exercise his ownership right to the asset, denominated in that currency. That, by the way, doesn’t cause any doubts either in the United States, or in Grate Britain and Japan. Incidentally, Japanese yen is very cheap, but, nevertheless, became the world’s reserve currency in the late 1960s right after beginning of falling prices.

So to emphasize once again, it’s not about the settlement system, it’s about the legal system or realization of the asset right in the broadest sense. Roughly speaking, if the Politburo in China can decide to confiscate everything, it is obvious what to be afraid of. Why hasn’t the Yuan become the payment unit? Because it’s not really a market economy over there. I mean, it’s a market, but not really. If you are investing in some assets and you are not sure if you will be able to exercise your right to these assets, why would you want such reserves?

Post-Crisis World Institute