Published: 07:09 AM, 15 May 2026
Trade Imbalances and the Fate of Local Currency Settlements
A currency does not become 'usable' in international trade merely because a country wishes it to. It becomes usable when markets trust it, when financial systems surrounding it are deep and liquid, and when trade relationships generate balanced flows that allow counterparts to hold and spend that currency without undue risk. In the absence of these conditions, attempts to rely on national or regional currencies often run into structural limits. The experience of trade with sanctioned economies such as Russia and Iran illustrates these constraints vividly. Receivables accumulate as idle balances in importing countries, clearing mechanisms become cumbersome, and ultimately global currencies - especially the US dollar - remain difficult to bypass.
This reality underscores a simple but powerful proposition: currency usability is a function of financial strength, market depth, and trade balance. Without these, even well-intentioned policy initiatives to promote local or regional currencies struggle to gain traction.
International trade is fundamentally a system of promises - promises to deliver goods, to pay for them, and to honor financial contracts over time. For these promises to be credible, counterparties must trust the currency in which transactions are denominated. Trust arises not from legal declarations alone but from macroeconomic stability, predictable monetary policy, and a financial market capable of absorbing inflows and outflows without large distortions.
When a country possesses strong financial markets, its currency becomes usable beyond its borders. Deep government bond markets, active interbank trading, hedging instruments, and transparent regulations enable foreign participants to hold and transact in that currency. Exporters are willing to accept payment in it because they can convert, invest, or hedge easily. Importers are willing to pay in it because liquidity is available and exchange risks can be managed.
Conversely, when financial markets are shallow or volatile, holding a country’s currency becomes a risk. Counterparties worry about convertibility, inflation, exchange rate swings, and the absence of hedging instruments. Even if trade partners agree to settle in local currencies, they often convert them immediately into globally accepted currencies. Thus, the local currency fails to circulate internationally in any meaningful way.
The dominance of the US dollar in global trade is rooted in precisely these factors. The dollar benefits from deep capital markets, large and liquid government securities, a global banking network, and widespread use in commodities and financial contracts. It is not merely a unit of account; it is embedded in a financial ecosystem that provides safety, liquidity, and investment opportunities. For many countries, holding dollars is equivalent to holding a liquid and relatively stable asset. This reinforces its role as a medium of exchange and store of value in cross-border transactions.
However, not all trade needs to be denominated in global currencies. Regional or bilateral arrangements using local currencies can work under certain conditions. Chief among these is balanced trade. When two countries export roughly equal values to each other, payments can be netted out. Each side accumulates the other’s currency but can spend it on imports from the same partner. In such a scenario, local currencies circulate within a closed loop.
For example, if Country A exports textiles to Country B while importing machinery of similar value from Country B, both countries can settle trade in each other’s currencies. The exporters receiving foreign currency can use it to pay for imports from the same partner. No large residual balances accumulate, and convertibility risks are minimized. Clearing arrangements, swap lines, or regional payment systems can facilitate such flows.
The challenge arises when trade is imbalanced. If one country runs a persistent surplus and the other a deficit, the surplus country accumulates the deficit country’s currency. If that currency is not widely usable elsewhere, the surplus country ends up holding idle balances. These balances may sit in special accounts or clearing arrangements, effectively becoming non-interest-bearing or low-yield deposits. They represent claims that cannot easily be converted into goods, services, or assets without exchange into a global currency. This is where the win–loss dynamic emerges. The deficit country benefits by paying for imports in its own currency, conserving foreign exchange reserves. The surplus country, however, bears the burden of holding a currency it may not need or trust. Over time, this arrangement becomes unsustainable unless corrective mechanisms - such as investment opportunities, swap arrangements, or third-country trade - are developed.
Trade with sanctioned economies illustrates this dynamic starkly. Sanctions often restrict access to global payment systems and reserve currencies. As a result, trade partners attempt to settle transactions in local currencies or through barter-like mechanisms. While these arrangements enable some trade to continue, they face structural limits.
Consider a country importing energy from a sanctioned supplier. If payments are made in the importing country’s currency, the supplier accumulates balances that may be difficult to use. The supplier may not be able to purchase sufficient goods from the importing country to offset these balances. Nor can it freely convert them into global currencies due to sanctions. The result is the accumulation of idle deposits in special accounts. These balances represent receivables that cannot be fully utilized - essentially accounting entries rather than usable financial resources.
Over time, the sanctioned country seeks ways to deploy these balances, perhaps by investing in local assets or purchasing specific goods. But such avenues are often limited by regulatory, political, or market constraints. The importing country, meanwhile, may impose restrictions on how the balances can be used. Thus, the arrangement becomes a partial solution rather than a comprehensive alternative to global currency settlement.
This experience highlights why bypassing global currencies is rarely straightforward. Global currencies provide not only a medium of exchange but also a network of liquidity, investment opportunities, and risk management tools. Without these, local or bilateral arrangements face friction. The more imbalanced the trade relationship, the greater the friction.
Regional currencies or payment arrangements can mitigate some of these issues, but they require careful design. Clearing unions, for example, allow multiple countries to net out trade balances periodically, reducing the need for global currency settlement. Currency swap agreements between central banks can provide temporary liquidity in partner currencies. Regional development banks can channel surplus balances into investment projects within the region.
Yet even these mechanisms depend on underlying economic fundamentals. If one country consistently runs large surpluses and others run deficits, imbalances will persist. If financial markets remain shallow, surplus balances cannot be invested productively. If exchange rate volatility is high, participants will prefer stable global currencies. Institutional trust, transparency, and policy coordination become critical.
The broader lesson is that currency internationalization cannot be decreed. It must be earned through sustained macroeconomic stability, open and liquid financial markets, and integration into global trade and finance. Countries aspiring to promote their currencies in international transactions must focus on strengthening domestic financial systems, ensuring convertibility, and building credible policy frameworks.
For many developing economies, the pragmatic approach is a hybrid one. Local currencies can be used in regional or bilateral trade where balances are manageable and financial links are strong. Global currencies can be used for broader trade and financial transactions where liquidity and risk management are essential. Over time, as financial markets deepen and trade networks diversify, the scope for local currency use may expand.
In this context, the persistence of the US dollar’s central role is less a matter of political dominance than of market functionality. It reflects the scale and depth of the financial system supporting it. Efforts to diversify away from the dollar must therefore address the underlying economic and financial conditions that sustain its use. Without deep markets, stable policies, and balanced trade relationships, alternative arrangements will remain partial and constrained.
The experience of trade with sanctioned economies reinforces this point. While local currency settlement and clearing arrangements can provide temporary relief, they do not fully substitute for access to global currencies and financial systems. Receivables accumulate, liquidity remains limited, and the usability of balances is constrained. The result is a system of accounts rather than a fully functioning monetary circuit.
Ultimately, the usability of a currency in international trade is inseparable from the strength of the financial market behind it and the balance of trade flows that sustain it. Where these conditions are met, currencies can circulate beyond national borders and support mutually beneficial exchange. Where they are absent, attempts to rely on local or regional currencies encounter structural limits. In such cases, global currencies continue to serve as the connective tissue of the international trading system - difficult to bypass, not because alternatives are undesirable, but because the supporting economic and financial architecture is not yet in place.
Mehdi Rahman works in the
development sector. He also
writes on foreign trade and
monetary issues.
