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Russian companies opt for Hong Kong dollar as new reserve currency

As the U.S. and EU introduce new sanctions, Russian companies are shifting cash to Hong Kong dollars and depositing them with Chinese banks.

Potential risks linked to Western sanctions prompted Russian mobile operator MegaFon, controlled by business tycoon Alisher Usmanov, to convert some of its cash into Hong Kong dollars, said the company's Chief Financial Officer Gevork Vermishyan. According to Bloomberg financial news agency, mining and metallurgical company Norilsk Nickel has taken the same step. Chinese media report Hong Kong dollars are deposited on accounts with Chinese banks.

This trend takes place at the same time as Russia and China switch to payments in rubles and yuans. During Vladimir Putin's visit to China in May, Russian VTB and the Bank of China agreed not to use dollars in transactions between the two countries.

Reorientation towards an Asian financial system is not without risks, vice-president of the Association of Regional Banks Oleg Ivanov told Rossiyskaya Gazeta daily. But Russia has already started working to reduce them to a minimum.

Exchange rates and currency stability is the chief stumbling block. There is no guarantee that the value of any of the two national currencies will not change dramatically in a year or several years. The dollar and euro are steadier in this respect but even this problem can be resolved, said Ivanov.

"Some international mechanisms can help maintain stability," the expert said. The Central Bank of Russia and its Chinese counterpart were now considering a foreign exchange swap agreement, he added. This means the banks will be able to make transactions in national currencies and then swap yuans accumulated in the CBR for rubles in the Chinese central bank on mutually beneficial conditions.

The preference for the Hong Kong dollar as a new reserve currency caused no raised eyebrows among analysts. On the one hand, it is strictly pegged to the U.S. dollar. Besides, it is the currency of China's special administrative region, albeit under a "one country - two systems" formula, and is therefore much less prone to risks connected to Western sanctions. In April 2013, the Hong Kong dollar ranked among 15 most-traded currencies with a $77 billion average daily turnover, according to the Bank for International Settlements.

"There are many restrictions for the Chinese yuan; it is not a freely convertible currency, while the Japanese yen causes certain concerns now," Alfa-Bank analyst Natalya Orlova is quoted by Vedomosti daily as saying. "Russian companies' willingness to shift to the Hong Kong dollar might be due to their attempts to make international payments through Hong Kong."

Singapore's dollar was another option but would not imply such a strong link to China, she added.

On the first wave of sanctions that affected the Russian bank Rossiya and SMP Bank, many banks hastened to open accounts on Hong Kong, said former director of research at Otkritie bank Kirill Tremasov.

The choice is logical, said lecturer at the business and management strategy department of the Russian Presidential Academy of National Economy and Public Administration Teymuraz Vashakmadze. "The Hong Kong dollar is more liquid than yuan, and there are only a few liquid currencies in the world," he told Itar-Tass.

Major Russian companies with production assets in the U.S. might follow the example, he added.

This decision was in line with the government's general course to avoid the dollar where possible, lecturer at RANEPA Institute of Natural Monopolies Research Vladislav Ginko told Itar-Tass. "Hong Kong is an international financial centre, and the Hong Kong dollar is a highly predictable currency," the expert added.

"Russian companies' wish to diversify is understandable as the situation is uncertain and risks are high," lecturer at Higher School of Economics world economy department Pyotr Mozias told Itar-Tass. "The more so since talks have intensified recently about Russia's reorientation towards Asian financial markets."

Even so, he added, the Hong Kong dollar cannot become a viable alternative to the U.S. dollar in Russia. "This is a temporary trend, and even East Asia rather considers the yuan its regional currency," Mozias said.

Russians will hardly buy Hong Kong dollars instead of U.S. dollars and euros to secure their savings, experts say.

"We should not forget that Russians are conservative; quite a few have never even heard of the Hong Kong dollar," said Ginko. "Besides, it is rarely accepted even in Moscow."

"Banking infrastructure is not yet ready for that, and the difference between buying and selling rates will be large," said Vashakmadze, adding that if Russians are to choose any currency, this would more likely be the Swiss franc.

[Source: By Lyudmila Alexandrova, Itar Tass, Moscow, 04Aug14]

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