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Darts at the Dollar

Russia and China are encouraging the abandonment of the dollar by developing international trade facilities that operate without touching U.S. currency.

In late 2010, Putin and Chinese Premier Wen Jiabao announced an agreement to settle certain trades in rubles and renminbi (another name for yuan). At the time, Wen Jiabao stated, "China will firmly follow the path of peaceful development and support the renaissance of Russia as a great power." This was the first agreement between the two nations that directly challenged the U.S. dollar's status as the dominant global currency.

In early 2012, China and Japan, which are the world's second- and third-largest economies and far from the world's best friends, followed suit. Their arrangement will allow firms to convert directly between yen and yuan instead of using U.S. dollars as an intermediary. That was the first time China allowed swapping yuan for any currency other than the dollar.

To put the deal into practice, the Japanese government said the Bank of Japan would buy 65 billion yuan ($10 billion worth) of Chinese government debt for its own reserves. That's only a tiny part of Japan's nearly $1.3 trillion of foreign-exchange reserves—mostly dollars—but it's a start.

Markets for swapping the two currencies will operate in Tokyo and Shanghai.

In September 2013, the Chinese government announced that the country's banking system was ready for anyone in the world who wished to buy or sell crude oil using the yuan rather than the dollar.

Other anti-dollar-currency events for China that year:

• A currency swap facility between the People's Bank of China (the central bank) and Banco Central do Brasil (Brazil's central bank) for $30 billion worth of Brazilian reals and Chinese yuan. Each central bank will be able to settle trade between the two countries without using dollars. China is Brazil's largest trading partner.

• A similar arrangement with Australia for $31 billion worth of yuan and Aussie dollars, again to facilitate trade without touching U.S. dollars.

• A similar arrangement with the United Arab Emirates (UAE) for $6 billion worth of Chinese yuan and UAE dirhams.

• A similar arrangement with Turkey for $1.6 billion of yuan and Turkish lira.

In June 2013, Wen Jiabao visited Chile to propose a currency swap arrangement, Chilean pesos versus Chinese yuan.

At the end of the year, South Korea and China announced they would allow their banks to draw on an existing 64 trillion won ($59 billion) swap arrangement between the two countries' central banks to settle import/export transactions.

To support all these arrangements, in March 2014 China opened two centers to process yuan-denominated trades, one in London and one in Frankfurt.

And in July 2014, Chinajoined in yet another currency swap, with the Swiss National Bank, for 150 billion yuan versus 21 billion Swiss francs (worth about $23 billion). The deal allows the Swiss central bank to invest in the Chinese bond market.

Other countries are following the lead given by Russia and China.

Also in July 2014, the BRICS countries (Brazil, Russia, India, China, and South Africa) took a huge step toward autonomy at an economic summit in Fortaleza, Brazil. First, they agreed to the creation of a New Development Bank (NDB), based in Shanghai, which will help fund development needs of the BRICS countries and other emerging markets. It has an authorized capitalization of $100 billion.

Second, they also agreed to fund a Contingent Reserve Arrangement, or currency reserve pool, initially capitalized at $100 billion. It is designed to help protect the BRICS countries against short-term liquidity pressures and international financial shocks.

What currencies will be involved are not yet known, but these five countries are clearly moving to disengage from the Bank for International Settlements (BIS) and the International Monetary Fund (IMF)— both of which are subject to the dollar's current dominion.

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