Not so long ago, Dmitry Medvedev, Prime Minister of Russia, said that the Russian Ruble might turn into a major (reserve) currency in the near future. The statement was viewed as breaking news around the globe.
Does the Russian national currency really have all chances to become a major currency? If this is the case, how will Russia benefit from it? Market Leader and will ponder on these questions in this article.
Reserve Currencies.
According to , a reserve currency is a currency that is used by foreign central banks to form their currency reserves. On the face of it, any currency can become a reserve one as long as foreign banks include it in their portfolios. However, that is not true. In reality, such a currency should meet a wide range of corresponding economic conditions that determine the narrow circle of reserve currencies.
Today’s list of reserve currencies include:
· US Dollar
· Euro
· Japanese Yen
· British Pound
· Swiss Franc
A reserve currency implies:
· Servicing external trade
· Ensuring global capital flow
· Determining prices in external trade
· Serving as the peg and basis of exchange rates for minor currencies
· Being a tool for currency interventions
It should be noted that some of the functions are optional. In particular, the Swiss Franc is not used in foreign trade but is viewed by most investors as a reserve currency and a safe haven asset to secure against financial shocks. The British Pound is a reserve currency mainly due to the UK’s status of a global financial and banking center. The British economy is far from being as strong as before.
Moreover, the experts from say that there are certain conditions for countries emitting reserve currencies. In particular, they include:
· Free-floating currency status
· Relative stability of exchange rates
· Favorable legal environment
· Developed banking, financial and insurance infrastructure
· One of the leading positions in the international trade and politics
Turning Ruble Into Reserve Currency: Benefits And Drawbacks
Benefits:
· Borrowing for a longer period and at lower interest rates if foreign central banks include Russia’s national currency in their currency reserves.
· Turning into a real superpower, with pegging the Ruble to gold and enjoying higher demand abroad.
· Simplifying international payments.
Risks:
· The Russian Ruble may fall prey to market speculations (Forex trading).
· The Central Bank of Russia won’t be able to control the volatility of the RUR exchange rate.
Anyway, if the Russian Ruble becomes a global reserve currency, Russia will turn into a superpower with all the ensuing consequences (benefits and drawbacks).
If this is the case, traders and investors are recommended to go bullish and buy up the Russian Ruble…
