The weakening of the dollar on currency markets gives the European Union the opportunity to strengthen the euro as a reserve currency. To that end, Brussels has been trying to persuade its main energy supplier, Russia, to fix some of its oil export contracts in euros. RFE/RL speaks with two economists about the EU's maneuvering.
Prague, 30 October 2003 (RFE/RL) -- The European Union is making a political push to strengthen the position of the euro, the only real alternative to the dollar, in global trade.
Part of this is aimed at trying to persuade Russia, which supplies more than half of the EU's fuel and energy needs, to fix some oil export contracts in euros.
Christopher Weafer is chief strategist at Alfa Bank in Moscow: "Countries like Russia, like Japan [and] China hold a great deal of foreign exchange reserves, and they hold those reserves mainly in U.S. dollars. Russia, China, and Japan between them almost have $1 trillion of U.S. currency in reserve. That effectively, therefore, is a 'free' [cheap] loan -- a big boost to the [U.S.] economy. The European Union would like a piece of that action," Weafer said.
Japan and China are the world's largest exporters of general goods. Russia is the world's second-biggest oil exporter. These countries use their cash in dollars to buy U.S. treasury bonds, thus helping the U.S. government support its growing deficit.
Traveling in Russia with German Chancellor Gerhard Schroeder earlier this month, President Vladimir Putin said he does not rule out denominating oil exports in euros.
As the dollar weakens against the euro, Weafer points out, such a move would make economic sense: "For sure, it would suit the Russian economy a lot better if a bigger portion of the export revenue was earned in euros. I think that's quite clear because over 50 percent of Russia's imports are now priced in euros, whereas about 70 to 75 percent of export revenues are in U.S. dollars."
In practice, though, Weafer says, there is little prospect of any significant oil export volumes being priced in anything other than dollars. The global commodities businesses -- pricing, trading, and settlement -- are today based mainly in dollars. And trading in any other currency would involve extra costs and extra risks for the oil companies or for the exporters.
Russian Prime Minister Mikhail Kasyanov himself has made clear that the government will not force the market's hand, while Putin has warned that Moscow does not want to hurt prices on the market. And some analysts have pointed out that Moscow's favorable remarks may only be a new bargaining chip in tough talks with the EU over Russia's bid to join the World Trade Organization. Brussels has blocked that move in part over what it sees as Russia's unfair gas pricing.
Robin Bew is chief economist at the Economist Intelligence Unit in London. He notes that whether global cross-border oil exports -- totaling about $450 billion annually -- can be priced in euros depends largely on the position of the Middle East countries. He says there is no incentive for these countries to start invoicing in euros because most of the goods that the region is buying are sold in dollars.
"Although Russia is a very significant oil producer, the Middle East is more significant still. And all the time that they invoice in dollars -- and the U.S. clearly is the world's largest market for oil sales -- Russia is going to want to be involved in that trade. And that really means that Russia is going to have to invoice at least part of its sales in dollars," Bew said.
However, Bew points out that the euro has already become an important currency, given that most trade within the EU, which represents 40 percent of world trade, is invoiced in euros. And Bew adds that there is a gradual shift in which the euro is becoming more important as a reserve currency.
"At the moment, international currency reserves are very, very heavily weighted towards the U.S. dollar. There's been several reasons for that. One of them has been that returns on U.S. dollar assets have been very high over the last few years because the U.S. economy has been so strong. That's gradually changing, and you're likely to see central banks, particularly in Asia, who'll probably sell some of their dollars over the next few years and buy more euros," Bew said.
But for the euro to be used more widely as a currency for invoice by countries outside the eurozone is less likely, Bew says. He notes gross domestic production of the 12 countries of the eurozone -- which excludes Britain, Sweden, and Denmark -- remains smaller than the GDP of the U.S.