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17 Jun, 2009 07:08

Focus on North Korea and reserve currency in Russia-China talks

North Korea's nuclear threat and the global financial meltdown are to loom large in talks between Russian and Chinese leaders in Moscow.

Chinese President Hu Jintao has already met with the Russian Prime Minister Vladimir Putin at his residence in the Moscow region.

The meeting follows a forum of the world's four key emerging economies – Brazil, Russia, India and China – or the BRIC group – in the Urals.

A milestone in Russo-Chinese relations – that’s how Russia’s president Medvedev has described Hu Jintao’s state visit to Russia. With 2009 also being the 60th anniversary of the establishment of diplomatic relations between the two countries, it certainly is turning into a landmark event.

The meeting is expected to focus on practical matters – such as Russo-Chinese trade and economic cooperation. Ahead of the meeting, President Medvedev again talked of the need for a new reserve currency, and suggested that trading partners use their own currencies in mutual settlements.

“We must strengthen the international currency system, not only by strengthening the dollar's position, but also by creating new reserve currencies and possibly by eventually creating supranational payment instruments and means of settlements,”Medvedev stated on Tuesday at the Shanghai Cooperation Organization (SCO) in Russia’s Urals.

Since the outbreak of the current financial crisis, the confidence and role of the US dollar have been seriously undermined. Russian and Chinese officials have questioned the dollar’s status as the dominant currency on several occasions in recent months.
China’s Central Bank governor caused a stir in March when he suggested replacing the US Dollar by the Special Drawing Right (SDR) – a unit of account issued by the International Monetary Fund.

As two of the world’s biggest holders of US Dollar assets, Russia and China don’t want a sudden fall in the US currency, but even small steps to diversify their currency reserves away from the dollar have rattled the markets.

Chief economist of the National Bank Trust, Evgeny Nadorshin, told RT the current situation in the market makes its participants consider diversifying their reserves – and their will is pragmatic and is not dictated by the Central Bank. .

To address these concerns, US Treasury Secretary Timothy Geithner visited China at the end of May to give assurances over the safety of dollar assets, and met with his Russian counterpart at the sidelines of the G8 Finance Ministers meeting.

As a result of these meetings, finance officials from both countries announced that no one was talking about dumping the US dollar in the near future.

That didn’t satisfy the markets, and the Dollar continues to rise and fall in line with the political and economic tides.