 Hello and welcome to NewsClick. Today we have with us Dr. Rajatnag Falberli, managing director general of ADB, Asia Development Bank and who is with us today to discuss what is happening to the currency wars which seem to be now going on in the world. Rajat, Ukraine has been an issue in the news but behind the scenes what has really been of interest to a lot of people is what is happening in the global currency market. Rubel fell very dramatically. It's again come up, reached almost parity with the dollar or where it was before the Ukraine war had started. But more than that, the fact that 300 billion dollars of Russian reserves were seized, essentially frozen. The Russian central bank is under sanctions. What does it mean for countries which maintain a currency surplus, foreign exchange surplus in other currencies, either in dollars, euros or whatever may be the combination? What happens to them? Does it mean the basis of international trade which assumes that even if I am holding money in your bank, it's really my money and that's what the basis of trade is? Is at risk if this thing happens? Well, in a sense, short answer is yes, because the whole premise of reserve currency and the predominance of the US dollar in the last century is predicated on, of course, the size and strength of the US economy, its stability, openness to trade, capital flows, etc. But much more fundamentally, the strong property rights and rule of law, which is assumed to be the case. And that is exactly as you said, you're holding my money, I give it to you in trust. I'll take it back when I want to, under conditions of the contract, whatever that is, maturity, etc. So you're absolutely correct. It does. Now, I think geopolitical issues like the one we see now, or as you were mentioning before, the show was being recorded in Afghanistan or Venezuela or Iran. Using economic sanctions of the type of global reserve currency, I think is against the fundamental spirit of this trust on which the international trade is based. And therefore, we can talk separately and later on in the show about the strength of the US dollar reserve currents, etc. But I think I for one have spoken very clearly on this issue that you cannot have it both ways. You cannot say, I am the repository of your trust, and in return for that trust, you put your money with me. And then when things go wrong, whichever be the reason, I'm not getting into complications and justification. Then you walk away from that trust. I think it's a very bad precedent. For instance, Afghanistan reserves with the US Treasury being seized. And then it was not only seized, but it was even given to 9-11 victims on which Afghanistan government or the state was never held responsible. And again, another 3.5 billion dollars I think was given to those who are going to send aid to Afghanistan without the consent of the Afghanistan government or whichever the Afghanistan central bank. As you said, Venezuela, gold was another example. But underlying what you said is the US currency strength is the convertibility aspect that I can hold it. My reserves in US dollars converted whenever I require, whatever I have needs of. And therefore, when I do trade and I give my goods to you, say, and you hold it in bank, it's really my money, not your money. And therefore, if you reach on transfer of that, it's really then taking back what you're supposed to have given in trade. That's a breach of faith. The issue that I'm going to raise with you, when now Russia asks money for rubles, gas, is it because of this, that if they give it in euros, as Putin says, this is like giving away gas free because you will hold that money and you don't have to give it back to me. I think there are two aspects to it. Why don't people trade in rubles or Indian rupees or much less of other currencies? I mean, it's still the bottom line is the US dollar is accounting for 96% of the trade, financial transactions and trade in the Americas. And overall, I think it's about 80% overall global trading. That's because of this confidence that you know that if I have a dollar, I can go and change it into Indian rupees or rubles anytime anywhere. Whereas if it's the other way around, I may or may not be able to. Okay, so that's the one side, which is the confidence. But the confidence is also on the supplier, which is the US saying, if you hold my dollar, I promise to honor this period, doesn't say if this, if that, if that. And to me, the two are very important. And the reality of course, and again, we'll talk about it later if you wish, or the strength of the US dollar as a reserve currency. You know, at the moment, if I remember my figures correctly, the US accounts for 20% of the global economy by the nominal GDP, and 60% of the international reserves are held in the US dollar. I already gave you the figures for the trade bank liabilities and international bank liabilities and claims are similarly of that of that figure. So it's one thing that is very predominant and therefore, of course, you know, confidence reach confident people say somebody's holding dollars, I'm better holding dollars rather than Indian rupees. But, and this is the point I think you're alluding to, I'm very sympathetic to countries outside the G7 area, start to do more intracurrency trade of their region and Saudi Arabia has started now for the first time, willing to accept and then be for oil. I think India is saying, you know, is willing to look at paying in other currencies. And I really think that's the only out. This is not anti US or a pro US or anti Russia pro Russia position. It is just safeguarding your own interest. And even if you have to pay a certain premium, that is, if you trade in rupees, I'll take a say 1% premium or half a percent premium. It may be worth it for countries, emerging countries to start thinking of those options at the moment, as you know, even the remnant be which people talk about the increasing Chinese strength accounts for less than 2% of the global trade. So we still have a long way to go quite frankly to challenge the US dollar as an international reserve currency or a trade currency. But to me, the recent events in Ukraine that you referred to are again a confirmation that the world has to start moving to a multi currency reserve or multi currency option. In a long term, if we look at the trends and you're right that the most transactions in the world are denominated in dollars, they're not in dollars in the sense between countries that I buy. That's what I'm saying. So they're denominated in because most countries think, OK, all our currencies are linked to the dollar. So if they're denominated in dollars, then we don't have to then compute what is our currency worth at any point of time. It's sort of benchmark to the dollar. That's why the denomination in dollars. I'm making a distinction between having trade settled in denominated in dollars or is there a transaction in dollars which can take place through US banks or it can even have between two central banks of the countries. So what I'm saying here is that I'm going to come back to the ruble Russia gas issue that denominated in dollars. Now, for instance, when you look at Russian oil that India is buying, the argument is we will do a rupee ruble exchange. Now, if you do a rupee ruble exchange, of course, what is it going to be benchmark to because rupee and ruble both are not convertible and they therefore can move at different rates. And therefore the argument benchmark it to the gold benchmark to yuan. The minute you benchmark to the dollar, you have a problem because US law says any transaction in dollars is under US law. And that extra territoriality of US law is the second problem of denominating any transaction in dollars. So it's not only the issue of why it is denominated in dollars, but denominated in dollars brings it under US law and US sanctions, not international sanctions is really the problem. So what's your question? My question is therefore it we could move to a mark while having trade in our currencies. We don't have to therefore look at only international, you know, finding immediate solution to international currencies, having alternative currency. You know, is going to have to be exactly along the lines you mentioned. I think what's happened in Ukraine is a wake up call once again for countries like India, because, you know, today you might be friends with, you know, the G seven tomorrow you may fall, you know, follow some of their views, and then you are vulnerable to exactly the sort of issues that talking about. So to me, you've got to work in parallel tracks. One is recognizing that this is an issue. Denominating in dollars, which then takes away the foreign exchange risks for, you know, countries such as India or Russia or whatever was a big help. I mean, so once you develop systems like that, it was good for international trade globalization was fueled by large part by this, you know, global currency, the US dollar has become, but if that confidence is being eroded, if not shattered, then I think countries are well advised to start thinking along the lines that we mentioned. Now, I think my other point is that having said that you've got to make sure that you realize the enormity of the predominance of the US dollar in the global trade scene, denominated or actually traded doesn't matter, the settlement will still go through the dollar. I'm good too. Yeah. So I think, you know, leaving aside the entire geopolitical issues and I know you can't divorce them and you shouldn't. From an economic financial policy point of view, I think countries like India or China or Saudi Arabia or whoever need to start thinking of bilateral settlements and be prepared to pay a cost. I think the point is people forget that, okay, if I do it in Russia, rubles to rupees. So what, so what is exactly what you said they're not convertible. So you've got to pay a certain premium. My view has been and is and actually now I feel more strongly about it after the recent events that that's a price you might have to be willing to pay to avoid a crisis in the future when suddenly your reserves are frozen or not available. And you know, the other part of what you're saying, I think this is an interesting issue that if you take, for instance, 20 years back, 80% of the countries had major trade partner as the US today, it's not true. In fact, I think 80% of the countries have major trade partner as China. What US is extremely strong in still is basically the financial structure which they seem to still control the whole set of services which really are dollar denominated and also depend on say two centers of in the world, New York and London, the city of London, which seem to offer the major part of financial services, but when you talk of commodities goods, including intellectual goods, actual, you know, in that sense, which is a part of it is really services. Lot of that is no longer United States as it was dominant 50 years, 70 years back and as late as only 20 years back. So that shift is not reflected in the currency world, financial transaction world. And what you're saying is we should start looking at that shift also. For several years, certainly after the Asian financial crisis at the Asian Development Bank, we started very actively talk about regional financial markets exactly the point you made. I mean, you know, why should New York and, you know, Wall Street and City of London be the centers or Frankfurt? Why not Bangkok? Why not Hong Kong to certain extent is Tokyo certainly is but Bombay or Singapore are not. Now, as you probably know and might have mentioned this in my previous conversations with you. If somebody in Thailand wants to invest in laws across the border in Thai bars. Ironically, they have to go to City of London or New York today that financing so money goes from Thailand to London or New York and then back to the Indian and that is exactly why you need a regional financial market. As you know, Asians are very 50 and we save about 34% of our income. And yet we're short of funds. Why? Precisely because of the point that you mentioned the financial markets. So in a way the Americans have done it very smartly and have it both ways. Doesn't matter they're not trading as much as we said China is now the largest exporter even to the US. But the financial markets architecture is very, very US dollar denominated and dominated as well. And that still continues to be the case. Obviously, the Americans are not keen at all to see a regional financial market happen. They haven't been against it for a long time. But I think Asia, particularly Asia as it gets stronger economically in the center of gravity shifts to Asia. I think we have to start talking for creating regional financial markets, precisely for the reasons that you mentioned. Till we do that, it doesn't matter whether the trade is in goods or services. So long as you are settling in dollars, the dominance will continue. Will be there. So what if I may summarize my words, not yours, so you may disagree with what I'm summarizing. That the financial system today in the world has a disjunction with the production and the physical flow of goods and services. So what is happening is the financial control resting with the United States to a lesser extent with the city of London and maybe to some extent European Union. What's happening is though the production systems have shifted, the financial systems have not, permitting therefore weaponizing finance and the clearest case of weaponizing finance earlier, much earlier was Iran, was thought to be an outlier. Next we had Venezuela, we had Afghanistan, but this is a G7, G8 country. So what are the top economies of the world? To have this happen means that this kind of financial weaponization in this case weaponization of the dollar puts every country who disagrees with the United States on any issue at risk. So would you say that this physical and the financial systems are growing apart and they would at some point realign even if it takes a long time? I think, well I hope they're realign, I don't know quite frankly because though as I was saying that the Americans were very much against creating the Asian financial markets, Asian war markets. I have to be very frank and say Asian countries were not that keen either, not because they disagreed with the principles everyone said, we should not brilliant idea, this is after the Asian financial crisis. But and that but was my currency should be the prominent one whether the Chinese Yuan or Indian rupee. So unless Asia or rest of the world come together better than they do now, it will be a problem. But I don't see any other way precisely because of the risk of weaponizing or arbitrage, whatever you call it. And also because it's very unhealthy because the global system ultimately depends not on the sophistication of the computer systems and the bitcoins and all of that. It depends on a fundamental issue of trust. And that is why the dollar is what it is. And the last century, the previous one it was the British pound but in the history of the world only this switch has happened only once British pound to the US dollar. Now, will the US dollar be replaced? I think there are risks precisely for the reasons that we mentioned Europe, certainly Europe is now more dominant than the US dollar. And I think the other countries, particularly in Asia and I keep saying Asia, not because other countries are not important, but Asia is going to be predominantly the global powerhouse. And if it's the global powerhouse, it better start taking the financial systems as well into its domain of concern. At the moment I have to confess that I don't see much between the countries which really should, which is China, India, Japan, Korea. So while we obviously worry about what the US is doing or not and the G7, frankly, we've also put a mirror to ourselves that we ourselves in Asia are not stepping up to the plate. Two, two, makes two statements. One, historical question to you, we might look back and discuss it another day. Was Gilder probably was an international reserve currency for a period in the 16th, 17th century before the British pound? Because the Dutch were the first in that sense to do large-scale trade. But yeah, so this is probably the third time that we are looking at a change possibility. At that time I think probably the trade was more in gold, I mean, what sort of a gold standard? But you may write, the Dutch Gilder was certainly more. Yes, even the dollar in the initial phase of the Bretton Woods was a gold standard. It only went up gold standard in 1971 before that all currencies really accepted theoretically the gold standard. But the other part of it, and I think this is where my view would coincide with yours on this, is that ultimately it's not a question of the physical economy. It's not a question of the financial system. It's really a question of politics. And if there is no political will to do something, it won't happen. And what you pointed out is between the economic system of production which is moving away from the United States and the financial system which is still controlled by western powers, the lynchmen being of course the United States, and clearly its military strength, what really is the issue is do we have a political will to shift the financial systems of the world? And I think that's the crux of what we are seeing. So ultimately, yes, you're absolutely right. It is the political will of the countries that determine which way it goes. And what you said earlier, I think that's the point very well taken. This is a wake-up call once again that if we do not do this, then we are putting our economies at risk. Thank you very much, Rajat, for being with us. For once we have been agreeing much more than we have been disagreeing. So I think that's a first for us. Always a pleasure talking to you. Always a pleasure and all very stimulating. Thank you very much. This is all the time we have in our discussions on a very tricky issue, global currency, economy, finance, which none of us really understand. That's why we need people like Dr. Nark to explain some of these things to us. Please do keep watching, do click and please go to our website to follow up on the issues that we like to bring to you to explain what are the intricacies of these subjects.