The Dollar’s Quiet Exit from Asian Trade

In July 2023, Indian Oil Corporation paid for a shipment of Abu Dhabi crude in rupees. The standard procedure for international trade has been to pay and settle transactions through the US dollar, an external and unrelated currency. The transaction was settled through a vostro account in Mumbai, and similarly, trades have been settled across ASEAN and South Asia through the use of Local Currency Transaction (LCT) frameworks. This movement now represents three ASEAN central banks, a $30 billion
India-Indonesia trade relationship, and almost a full LCT framework in ASEAN.

Asia is dominated by two strong international institutions and coalitions such as ASEAN and BRICS, covering more than 40% of Global GDP, reflecting the transition from the Western-dominated global political stage. While these economies may have been dependent on the dollar for trade, a rapid de- dollarisation movement has taken hold, most prominently within ASEAN and Southeast Asia. While ASEAN has implemented operationalized, real-time, local-currency payments across 8 member states
using standardized QR linkages, proposing a parallel financial system that makes transactions cheaper and quicker, the BRICS idea of a unified currency and a strongly motivated de-dollarisation plan remain fully aspirational. However, the economic impact and the impact of this movement on the political stage remain widely shared.

Economically and financially, this de-dollarisation move has the greatest potential benefit. Businesses and trading partners only have to convert currency once or less per transaction, whereas previously they had to convert it twice. De-dollarisation also addresses another problem in this pricing mechanism: transactions and trade were heavily driven by hedging and speculation in the US dollar, creating noise and excess costs in trade and increasing costs for businesses when exchange rates fluctuate. Moreover, without the need for US dollar foreign currency reserves, countries can divert funds domestically or internationally, resulting in potential economic and infrastructure benefits. However, the primary goal of this exercise is that, without the need for an external currency, economies can shield and protect themselves from Western currency-specific enforcement tools (freezing dollar reserves, cutting off dollar clearing), bolstering independence while ensuring economies remain open to global trade channels, maintaining economic pragmatism.

Aside from the obvious threat of tariffs and sanctions as a justification for a de-dollarisation framework, other important developments also contribute. First, after 2022, when Russia found $300 bn of its dollar reserves frozen overnight, it showed that the dollar portion of any country's reserves still runs through US-controlled financial infrastructure, no matter whose asset it technically is. Therefore, countries andeconomies, especially in such troubling, tumultuous times, cannot risk their access to trade being revoked.

Even with the LCT framework ongoing, much of ASEAN's dollar exposure remains the same. Oil, key metals, and other commodities are still priced in dollars on global exchanges, so the LCT framework cannot address those essential products. Capital markets and dollar-denominated debt sit outside LCT entirely as well. And the mechanism itself has a narrow use case, since it only operates where both sides want to hold each other's currency, limiting some international trade connections.
India's own experience with Russia shows what happens when that condition isn't met. Indian refiners bought vast amounts of Russian oil after 2022 and paid in rupees. Because India bought much more than it sold to Russia, Russian firms accumulated billions of unspent rupees in Indian banks that they could not easily move or use. The rupee settlement system functioned as intended, but failed because the trade between the two countries was unbalanced. Settlement currency and sanctions exposure are also different problems. LCT changes which currency a trade clears in, but the ships, insurers, and
correspondent banks behind that trade often still sit inside networks that US, EU, or UK sanctions can reach, so paying in rupees does not by itself remove that exposure. Furthermore, as de-dollarisation plans and the US dollar loses its strong foothold in trade, a power vacuum forms, which China naturally fills, embedding the Renminbi deep into Southeast Asian supply chains and challenging India’s prospects as a leading Asian economy. This clearly demonstrates the power transition the geopolitical
landscape has witnessed; as power shifts from the West to the East, now the question is, who can capitalise?

To address this issue, instead of focusing on region-wide LCT and shared currency frameworks, the RBI is instead pushing for a select few high-value LCT deals, such as with the UAE and Indonesia, while prioritising a simpler UPI payment system and other digital payment frameworks with ASEAN countries like Indonesia, acting as a direct geopolitical counterweight to keep the Rupee competitive against the Yuan in ASEAN, and ensuring a multilateral alliance and connection.

While trade in US dollars is universal, LCT frameworks can restrict trade to one country and may require separate reserves of different currencies. To address this core issue, countries could maintain a single main currency such as the Singapore dollar (most stable against the US dollar, allowing for cheaper conversion and international trade), ensuring universality and tradability within ASEAN and internationally. This anchor currency cannot be the Yuan. Even though China is ASEAN’s largest trading
partner, an anchor currency has to carry no political weight for the countries using it, and the Yuan fails that test for the same reason LCT and UPI exist in the first place.

Furthermore, central banks within the region could unify and combine their transnational QR code and digital payment systems with state-level LCT frameworks so the retail and wholesale de-dollarization tracks reinforce each other instead of running separately. However, the problem of commodities still relying on the USD cannot be effectively addressed by LCT frameworks, with the only option being securing commodity trade only within the LCT and ASEAN regional systems, which seems highly unlikely. For consumers, the rise of local currency systems can mean cheaper and more efficient imports of goods as well as greater flexibility and adaptability of cross-border payments.

Especially in the case of Indonesia and other ASEAN member states, with increasing tourism and collaborative economicpotential through the setup of easy-to-use LCT QR code payment systems for consumers. Therefore, the world will never truly achieve full de-dollarisation, but with the current state of the world, steps that ASEAN, BRICS and India are taking seem like steps in the right direction.