Sanctions that include freezing Russia's foreign exchange reserves have created an incentive for some countries to bypass the US currency.
The British Financial Times published a report by Robin Wigglesworth and Paulina Ivanova in which they said that South African President Cyril Ramaphosa was not the only one who adopted a "balanced" position on the war, refusing to take sides;
After Russia's war on Ukraine, Brazilian President Jair Bolsonaro expressed his neutrality, Mexican President Andres Manuel Lopez Obrador refused to join the sanctions imposed on Russia, and China - the world's second largest economy - refrained from criticizing the war on Ukraine.
The authors note that the Ukraine-Russia war may have important implications for the future of international finance.
Countries around the world are responding to the dramatic move by the United States and its allies to freeze Russia's foreign exchange reserves.
Sanctions on Russia and the dominance of the dollar
According to the authors, the strength of the sanctions imposed on Russia is based on the dominance of the US dollar, which is the currency most used in trade and financial transactions, and the reserves of the central bank.
By arming the dollar, the United States and its allies risk provoking a backlash that could undermine the value of the US currency and plunge the global financial system into a frantic race that could make the global economic situation worse, says Credit Suisse strategic analyst Zoltan. Buzsar says, "Wars turn the hegemony of currencies upside down and help give birth to new monetary systems."
Sanctions on the Russian Central Bank may be seen not only as an effective strategy to put pressure on an adversary in the West, but also as a decision that has contributed to the decline of the dollar's hegemony.
The authors note that China, in particular, has long-term plans for its currency to play a much larger role in the international financial system;
Beijing views the dollar's dominance as one of the bastions of American power that it wants to get rid of, as well as the US Navy's control over the oceans.
The authors quote Zhang Yanling, former executive vice president of the Bank of China, in a speech last week, in which she said that sanctions "will discredit the United States and undermine the dollar's hegemony in the long run," and suggested that China help the world "get rid of the dollar's hegemony." .
The authors show that there have always been expectations of a collapse of the dollar in the past, but those expectations have only increased the US currency in strength and influence, but if there is a steady shift away from the dollar in the coming years, sanctions against the Russian Central Bank may be seen as not an effective strategy. To put pressure on one of the West's opponents, but as a decision that contributed to the decline of the dollar's hegemony.
“Targeting a country the size and power of Russia is unprecedented, as actions taken against it can contribute to the establishment of a new order in the future,” says Mitu Gulati, professor of financial law at the University of Virginia. The rules change for the entire world, and once those rules change, the international financial sector changes.”
Russia: Just a plan to steal Russian money
The authors note that with Russia accelerating its buildup on the border with Ukraine earlier this year and threatening war;
The country's top financial officials conducted a stress test for the impact of potential sanctions, and by the end of February, Russia had launched a war on Ukraine, imposed sanctions and frozen a large part of the Russian Central Bank's foreign reserves.
As a result, the ruble fell to 135 against the dollar, down nearly 50% since the beginning of the year.
In this context, Russian Foreign Minister Sergey Lavrov said last March, "No one expected what sanctions the West might impose, but the decision to freeze the reserves of the Central Bank was just a plan to steal Russian money."
The authors confirm that the situation - after 5 weeks of war - witnessed changes, at least on the surface. The ruble regained most of the gains it lost in the days after the sanctions were first announced;
This prompted some Russian officials to say the measures failed. Vyacheslav Volodin, the speaker of the Russian lower house of the State Duma, said a few days ago, "This is the beginning of the end of the dollar monopoly in the world," adding that "anyone who keeps their money in dollars today is no longer sure that the US The United States will not steal his money.” He continued, “The infernal sanctions did not work, as they hoped for the collapse of the economy and paralysis of the banking system in Russia. But they failed to do so.”
In contrast, analysts say the recovery of the Russian economy largely reflects the strict capital controls and interest rate increases that Russia has revealed in response to the sanctions, and add that the impact of the sanctions will be severe on the Russian economy, regardless of the improvement in the ruble currency.
Use of local and digital currencies
The authors caution that there is some initial indication that Russia may find ways around sanctions and the US dollar-based financial system, potentially providing a backdoor for payments to Russia.
Indian officials say the government and central bank have discussed concluding a trade deal in local currencies, the rupee and ruble, a mechanism the two countries used during the Soviet Union era, which involved barter trade involving oil and other goods.
The authors continue that some fear that the war will be the beginning of a radical transformation in the global economy;
As Larry Fink, CEO of BlackRock - as the owner of the largest investment group in the world - in his annual letter to shareholders argues that "the Russian invasion of Ukraine put an end to the globalization we have seen over the past three decades," and said, "One of the results may be an increase The use of digital currencies” is an area in which the Chinese authorities have made important preparations.
The authors explain that the IMF also believes that the dollar's dominance could be eroded by the "fragmentation" of the system, although it is likely to remain the primary global currency.
According to the latest International Monetary Fund data, the dollar represented about 59% of the $12 trillion in foreign exchange reserves held by central banks around the world at the end of 2021, down from 71% in 1999, when the euro was launched.
Chinese payments system as an alternative to "SWIFT"
They add that the sanctions could accelerate changes in the international financial infrastructure, especially as China spent years developing its own renminbi-denominated interbank payments system (Cips), which now includes 1,200 member institutions in 100 countries, as it seeks to reduce Reliance on US-controlled systems, however, is still small compared to the European-based SWIFT payment system that is an important part of the anti-Russia sanctions regime.
In this context, Eswar Prasad, a former senior official at the International Monetary Fund, says, “The CIBS system has the potential to change the rules of the game as China is creating a payments and payment message infrastructure that could one day provide an alternative to the Western-dominated international financial system. Special Swift system.
Even before the outbreak of the war, the authors say, there were initial signs of a truly significant shift in the composition of central bank reserves, although over the past century US government debt has been the preferred place for central banks to store emergency funds due to the size and strength of the United States, the safety of its debt and its tradability. As the dollar's dominant role in international trade and finance, this privilege has eroded in recent decades.
According to the latest International Monetary Fund data, the dollar represented about 59 percent of the $12 trillion in foreign exchange reserves held by central banks around the world at the end of 2021, down from 71 percent in 1999, when the euro was launched.
Berkeley professor of economics and dean of studies of the international monetary system, Barry Eichengreen, said the common European currency is the main alternative to the dollar;
It represents 20% of the central bank's reserves, but he also noted that there has been a notable shift to smaller currencies such as the Australian dollar, the Korean won and above all the Chinese renminbi.
Leading economist at the Chinese Academy of Social Sciences, Yu Yongding, said in a speech last week that the sanctions "fundamentally undermined national credibility in the international monetary system."
Is it too early to sound the end of the US dollar?
The authors stress that despite all the speculation about the impact of sanctions, there is still strong reason to believe that they will not encourage a shift in the basic building blocks of global finance - at least - for the foreseeable future. An easy way for Russia to evade the impact of sanctions, which is explained by the director of the regional program of the Independent Institute for Social Policy, Natalia Zubarevich, saying that the sanctions will show their effect over a period of months, not days.
Moreover, the threat of US and European sanctions against entities actively seeking to help Russia evade the financial embargo would be a major deterrent, even for banks in countries that can help Moscow.
The authors go on to say that it is not easy for competitors to displace the dollar;
Some countries fear similar penalties due to a lack of viable alternatives.
The authors argue that this poses a particularly acute dilemma for China, with foreign exchange reserves estimated at $3.2 trillion to be invested, and it has no choice but to hold large holdings of dollars.
Also, non-European countries and perhaps Japan - which stood by America in this regard - do not have enough liquidity in financial assets in other currencies.
Difficulties in front of China's currency to spread globally
China also faces a major obstacle if it wants other countries to keep its currency in their reserves;
Although its capital controls are no longer as strict as they once were, the renminbi is still a completely non-convertible currency.
And in the past decade, since the Chinese Communist Party first began trying to internationalize the renminbi, it has realized that it can have a global currency that might one day rival the dollar or it can maintain tight control over its domestic financial system, but not a global currency.
“The harsh reality is that at this point the renminbi is not a large enough player in international finance to be a viable alternative to the dollar,” Eswar Prasad says.
Given the drastic changes that have occurred in the global economy over the past four decades, the authors believe that the continued control of the financial system by Western allies is an anachronism.
But at the moment, there are some loopholes in their currency system.
The authors conclude their report with the statements of a former US Treasury official, John Smith, in which he said that “the bell for the end of the US dollar in the international economy has been ringing every year” since about 2008, when Washington for the first time prevented Iran from using the US dollar in international energy transactions. But that did not have tangible effects.
John Smith adds, “Since then, there has been a lot of uproar about the US dollar losing its place as the reserve and currency of choice in energy markets and the international economy, but we have not seen that happen as the US dollar continues to maintain its strength as a source of stability in financial transactions. It is likely that it will continue to do so even after the end of the war that Russia launched against Ukraine.