On Tuesday, a new meeting of the Association of Southeast Asian Nations (ASEAN) began in Indonesia, bringing together the Finance Ministers and Governors of the ASEAN nations. At the top of the agenda was reducing the dependence of ASEAN nations on the US Dollar, Euro, Yen, and British Pound in financial transactions, and how to replace these currencies with transaction settlements in local currencies.
The meeting focused on reducing the dependence on major currencies through the use of the new Local Currency Transaction (LCT) Scheme. The LCT is a refinement of the Local Currency Settlement (LCS) scheme which had already begun to be implemented among ASEAN nations. Now with the expansion of this newer cross-border digital payment system, ASEAN nations will be able to use local currencies for trade, reducing, or even eliminating their dependence on the dollar and other major currencies for trade.
So far, Indonesia, Malaysia, Singapore, the Philippines, and Thailand agreed to cooperate using this system in November of 2022. Meanwhile, on March 27th, Indonesia’s banking regulator announced it was preparing to introduce its own domestic payment system.
Arguing Indonesia needs to shield itself from external geopolitical disruptions, such as geopolitical disputes which could cause Indonesia to be sanctioned by the world financial system, Indonesian President Joko Widodo urged local regional administrations in his nation to transition their payments over to credit cards issued by local banks, and gradually reduce their usage of foreign payment systems. He specifically cited the sanctions levied by the US, EU, and their allies against Russia over the conflict in Ukraine, which were designed to disrupt the Russian economy by shutting it out of Western financial payment systems it had grown dependent on.
Widodo said transitioning away from Western payment systems would be necessary to protect Indonesia from “possible geopolitical repercussions.”
Among all of the ASEAN nations, only Singapore has chosen to participate in the sanctions levied against Russia. All of the other ASEAN nations have mostly ignored the sanctions packages, as they continued to trade with Russia.
Among the nations not participating in the sanctions regimes however, there is concern that there could be a second wave of secondary-sanctions designed to target them for continuing to trade with Russia. It is amid this concern, that these nations are seeking to remove their dependence on major currencies and Western financial systems in order to engage in trade and the settlement of obligations.
It is just the latest part of a broader push of late, spurred on by the rise in geopolitical tensions, for nations to de-dollarize international trade settlement, as a way of shielding themselves from any economic fallout of the increasing tensions between superpowers Russia and China, on one side, and the US and the Western powers on the other, combined with their desire to not take sides, and continue to trade freely with whatever nation they choose.
