- Genesis of Ukraine conflict – 38
With the imposition of severe financial sanctions on Russia by USA and European Nations, it is yet to be cleared how far they are succeeding in damaging Russian economy. However, speculations are spreading widely stating that these sanctions are most likely to impact on the dominance of US dollar in global economy and also the premier status of Euro currency.
Some economists are predicting that US dollar is likely to face some of the same challenges that the British pound faced in the early 1900s. The move by the US and its allies to freeze Russia’s Central Bank out of much of its foreign currency reserves has aised concerns that countries could start moving away from using the dollar, due to worries about the power the currency grants the US.
Russia’s decision to invade Ukraine has been met with waves of Western sanctions that have limited Moscow’s access to its foreign currency reserves and the global financial market. According to Gita Gopinath, first deputy managing director of the IMF, the unprecedented measures could gradually decrease the dominance of the U.S. dollar.
Speaking to the Financial Times, the top IMF official also warned that the restrictions, including those on the Central Bank of Russia, could encourage the emergence of small currency blocs based on trade between groups of nations. She also predicted that the greenback would remain the world’s major currency but didn’t rule out a fragmentation at a smaller level.
She also mentioned that the dollar’s share of international reserves had fallen by 10 percentage points to 60% in the past two decades. Around a quarter of the decline can be attributed to the rise of the Chinese yuan. Beijing has been trying to internationalize the renminbi including by promoting its digital version.
According to her, the war will also boost digital financial assets, from cryptocurrencies to stablecoins and central bank digital currencies (CBDCs) s. “All of these will get even greater attention following the recent episodes, which draws us to the question of international regulation. There is a gap to be filled there,” she added.
Dollar- single important factor for US rise
The status of US dollar as the main international reserve currency, after World War II, has been and is today the most important single factor behind the US position as the biggest military force globally. The great power competition and the changes in the polarity of the international system are also due to this matter.
After WWII the international financial system was governed by a formal agreement, the Bretton Woods System, signed by 44 nations in the conference in Bretton Woods 1944. Under this system the US dollar was placed deliberately as the anchor of the international currency system.
This dollar status has allowed the US to achieve an unparalleled strategic advantage over its geopolitical opponents (initially the USSR, now Russia and China), namely, a practically unlimited dollar-spending capacity even as it accumulates a skyrocketing public debt (over $30 trillion in early 2022).
This has enabled US Government and Pentagon to establish, build up and maintain the military-industrial complex and military forces covering the whole world, “Command of Commons” as Barry Posen expresses this capability.
The 1973 oil crisis further fixed the value of the dollar as a result of this oil shock, bringing Saudi Arabia and the OPEC countries to make a secret agreement with Washington, the main architect being President Nixon’s legendary Secretary of State, Dr. Henry Kissinger.
In exchange for Washington’s political and military protection, the OPEC countries would be required to sell oil only in dollars. Petrodollar recycling means that oil exporting nations earn more money than they could possibly invest in their own economy and the surplus they shall invest in US debt securities. The term “petrodollar recycling” is coined by Henry Kissinger.
After 9/11 terror strike in New York (2001), the US government pressed hard SWIFT Society to allow the American authorities the access into banking data, in order to check, control and curb international currency transactions for terrorist purposes.
Finally SWIFT admitted the US authorities the sole access to data and quite soon the US began to utilize it for other purposes as well, namely for politically motivated sanctions.
Society for Worldwide Interbank Financial Telecommunication (SWIFT) is the Belgium-based worldwide society, the global provider of secure financial messaging services, covering over 200 countries and regions as well 11.000 banks and finance institutions.
De-dollarization process
However, after the world financial crisis of 2008-2010, the process of de-dollarization began to get more pace in the world economy. The de-dollarization process also entails political and military significance.
Off late, Russia and China are accelerating the de-dollarization process, which will have a fundamental impact on US dollar’s reserve currency status.
Russia’s gold purchases have been at record high level in last five years making Russia as the biggest purchaser and the fifth biggest holder of monetary gold in the world. There has been a strong shift from US dollars to euros, yuans and yens in the assortment of foreign currencies held by Russian Central Bank.
Russia liquidates nearly all its holdings of US treasury bonds and other US debt and invested money in gold. Total amount of forex reserves exceeded $ 620 billion in late autumn 2021 ranking Russia as the fifth in the world. Russia’s public debt-to-GDP-ratio is about 17% making one of the lowest debt-ratio states in the world.
Russia on mission to reduce dollar dependence
The Russian Federation has been trying to reduce its dependence on the USA currency for years, especially after the United States imposed sanctions over the annexation of Crimea in 2014. Russia is putting an emphasis on “de-dollarization”.
Following the latest round of penalties, introduced in response to Russia’s military assault on Ukraine, officials in Moscow have expressed interest in using cryptocurrencies and are even ready to accept bitcoin for energy exports, alongside the Russian ruble.
Efforts to legalize the crypto space have been gaining support and lawmakers have been working to adopt comprehensive regulations.
Prior to the war, Russia held approximately a fifth of its foreign reserves in dollar-denominated assets, part of which being overseas in countries like Germany, France, the U.K., and Japan, that are now taking steps to isolate it from the global financial system.
China relieving from dollar dependence
The ongoing trade conflict between the US and China as well as sanctions against Chinese entities have forced China to take steps towards relieving the dollar dependence of the world’s second-largest economy. The Chinese government has not made any loud announcements on the issue.
However, the People’s Bank of China (PBOC) has been regularly reducing the country’s share of US Treasuries, being still number-two foreign holder of the US sovereign debt. China like Russia started to develop its own foreign payment platform (CIPS), which is a competing system vs. SWIFT. The test use has been going since 2019.
Moreover, instead of promptly dumping the dollar, China is trying to internationalize its own currency, the yuan, which was included in the IMF basket alongside the US dollar, the Japanese yen, the euro, and the British pound.
Beijing has recently made several steps towards strengthening the yuan, including accumulating gold reserves, launching yuan-priced crude oil futures and using the currency in trade with international partners.
China is officially launching a digital yuan during the Olympic Games 2022, which is obviously a part of yuan’s internationalization agenda. Digital yuan has become quickly very popular, over 140 million personal wallets have been opened by the end of 2021 in China.
How far China & Saudi rescue Russia?
With the imposition of severe financial sanctions on Russia rumblings are that China will provide Russia a lifeline and rumours Saudi Arabia will denominate oil prices in renminbi, markets are once again abuzz about the dollar’s future global financing roll.
However, observers felt that China is most unlikely to provide much help to Russia in creating a financial lifeline to bypass sanctions and the dollar. The Russian economy comprises a small 2% to 3% share of the global economy. That share is shrinking fast.
Meanwhile, China’s is large and well-integrated into the global economy. It may wish to take advantage of Russian isolation to extract more favourable terms for imports of Russian energy. It is certain that China may not prefer to put its global linkages at risk for Russia.
Already, Chinese officials indicate that China wishes to avoid being impacted by the West’s sanctions against Russia. And Chinese banks are reportedly hesitating, if not refusing, to provide financing to Russian entities.
In the last week, press stories have suggested Saudi Arabia is considering denominating oil prices in renminbi. Even if that were to happen, the Saudis might then turn around and sell the renminbi for dollars and other currencies. Of course, the riyal remains pegged to the dollar.
