The Ministry of Finance set a course for the UAE dirham instead of the dollar

As an alternative to toxic currencies – the dollar and the euro – the government is also considering the dirham of the United Arab Emirates. This was stated by Deputy Finance Minister Alexei Moiseev, highlighting the Chinese yuan, which “now everyone is looking at first.” From the lips of an official of such a high rank, especially a representative of the financial bloc, the mention of the dirham in such a context sounded, perhaps, for the first time.

Moiseev called the option with the yuan the most preferable of all: “The market there is large and the exchange rate is stable, at least in relation to the dollar.” According to him, in recent months, Russian banks have begun to actively sell yuan to customers, including cash.

The volume of trading in the ruble-yuan currency pair has grown 50 times since February. The macroeconomic situation also contributes to this: in the period from January to August, the trade turnover between Russia and China reached $117 billion, and the parties planned to increase it to $200 billion a year.

In general, foreign currency for distribution in circulation must have such properties as exchange rate stability and liquidity. Plus, there should be no barrage of currency controls in the issuing country. In this regard, the same Indian rupees are not the best choice: “There are quite serious restrictions on what can be done with this currency.” And, of course, the Turkish lira is immediately swept aside (although Moiseev mentioned it in order “not to offend our partners”), which this year has depreciated by almost 27% against the dollar, only slightly inferior in depth to the Argentine peso.

As for the UAE dirham, it is stable, pegged to the dollar and may be of interest to Russian economic agents not only as a means of payment, but also as a “means of storing value,” the deputy minister noted. But there are also certain disadvantages: the economy of the Emirates is relatively small, the market is narrow in comparison with the Chinese one, and, accordingly, liquidity is incomparably less. According to Bloomberg, currencies such as the dirham are subject to “great political risks”.

“In order to evaluate the option with the dirham, you need to look at the volume of exchange trading,” says BitRiver financial analyst Vladislav Antonov. – At the end of June, trading in the Armenian dram and the South African rand began on the Moscow exchange currency market. The Moscow Exchange also promised to launch pairs “Uzbek sum – Russian ruble” (UZS/RUB), “UAE dirham – Russian ruble” (AED/RUB) and “US dollar – UAE dirham” (USD/AED). Haven’t launched yet.

The only thing that can be said about the Emirati dirham is that it has been stable against the dollar since 1990: to this day, one dollar costs 3.67 dirhams.”

Literally two or three Russian banks have shown interest in it so far. They publish rates, but the spread (the difference between the best bids to sell and buy a currency) is 10%. This is a lot, says Antonov. That’s when the Moscow Exchange opens trading in the dirham, the volumes will increase sharply, the spread will decrease, and the Russians will be able to use the currency of the Emirates to save money. It is also attractive for calculations, since it is not volatile, which means it is not interesting for speculators. Considering that parallel imports are supplied from the UAE to our country, the dirham will be in demand by Russian business.

“Under the current conditions, the Ministry of Finance is looking for how to replace the dollar and the euro in its reserves. As it turned out, there are few options, – says financial analyst Sergei Drozdov. – The liquidity of the dirham is much less than that of the yuan. And it is convenient because parallel imports go through the Emirates, car sales are in ever greater volumes. Earlier, in the 1990s, shuttles brought equipment and electronics from the UAE, now we are returning, in fact, to the past. So far, the dirham is not relevant for ordinary Russians – because of the large spread set by banks. We need exchange trading, then the demand for this currency will grow and the situation will change.”

According to Alexey Fedorov, TeleTrade analyst, due to its peg to the dollar, the dirham has very good stability: even during the global crisis of 2008-2009, exchange rate fluctuations did not exceed 0.5%. The state of the national currency of the UAE is determined by a fairly low level of public debt (38.3% of GDP), a balanced budget policy (in 2021, the budget surplus was 0.8%), and significant gold and foreign exchange reserves ($123 billion).

“However, the dirham has two obvious drawbacks: firstly, the financial market of the Emirates is too narrow, it will be difficult to place even those funds from the sale of Russian oil to India in the amount of $70-80 million per month, which Reuters reported in July, Fedorov says. – Secondly, political risks are high. For example, if the US and its partners decide that they need to freeze Russian money in the UAE, local authorities will probably not oppose it. In general, relations between the banking system of the Russian Federation and the dirham look strained so far. You can still find banks and exchange offices that allow you to convert rubles into dirhams. But with more complex operations, like opening a bank account and transferring funds from it in dirhams, there will be problems.”