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Sanctions on Russia Could End Up Eroding The Dominance Of The US Dollar

John Galt

Updated: April 1, 2022

global growth
Editor’s Note:

EDITOR'S NOTE: Imagine being forced to participate in a game where the pieces, rules, and contexts were defined by one major player. Not only are a few of the “other” participants “held hostage” by the major player by way of the game’s underlying contexts and mechanisms, but the game itself works stealthily and steadily against a certain segment of its players. What might happen if those participants were to create a “counter-game,” an extension of the board, with its own rules, and its own pieces? And what if an increasing number of players began adopting these new rules and pieces to a point where it begins redefining the game itself? This metaphorical preface introduces the article you’re about to read. It aims to figuratively illustrate the situation of the US dollar in global trade. The sanctions on Russia and its “swift” expulsion from the SWIFT payment system were enough of a wake-up call for many nations who feared the hostage-like implications of the US dollar in global transactions. What we’re seeing is the extension of an economic game board, its standard pieces supplanted by new and alternative game pieces, and a growing adoption rate that may eventually render the strongest player and its rules (the US) much less powerful. Might this mark the beginning of the end for the dominance of the US dollar on the global stage? Read on. 

  • Sanctions on Russia could end up eroding the dominance of the US dollar, a top IMF official told the FT.
  • Some countries are already renegotiating the currency they are paid in for international trade, Gita Gopinath said.
  • It could also spur the adoption of cryptocurrencies, but there is still a gap in regulation, she said.

The sanctions placed on Russia over its invasion of Ukraine could erode the dominance of the US dollar and spur the adoption of digital currencies, according to a top IMF official.

Stringent Western financial sanctions have frozen much of Russia's foreign assets and hit its ability to trade. While that has underlined the dollar's power as the dominant global reserve currency, it has also been a wake-up call for countries about relying on it too heavily.

Gita Gopinath, first deputy managing director at the IMF, said there are signs some countries are already renegotiating the currency they are paid in for international trade. 

"The dollar would remain the major global currency even in that landscape, but fragmentation at a smaller level is certainly quite possible," Gopinath told the Financial Times in an interview published Thursday.

Small currency blocs between some trade partners are starting to emerge, she added.

As countries accumulate reserves in the currencies they use for trade, these will take on a bigger role, which will dilute the dominance of the dollar.

The US currency's clout has already waned over the last two decades, and its share of international reserves has fallen from 70% to 60%, according to the IMF official. Australia's dollar and China's yuan, in particular, have made inroads as trading currencies.

More than 70 central banks hold some yuan as a reserve currency, and many African countries and some in the Middle East regularly use the Chinese currency for transactions, according to Baizhu Chen, professor of clinical finance and business economics at the University of Southern California.

"Some countries feel their economies could be held hostage to US policies because the dollar is dominant, and countries want to diversify their risk," Chen told Insider recently.

Read more: With the US dollar's dominance in question, here's how China's yuan could become a global reserve currency — and why it wouldn't be all bad

The US and its allies blocked Russia from using SWIFT, a global communications service that clears international financial transactions — effectively shutting it out of international trade. The US also froze $630 billion in assets held in international reserves by Russia's central bank.

Russia now demands payment in its currency the ruble for natural gas exports, and a top lawmaker said on Wednesday the ruble should be required for more commodities. Another Russian lawmaker has suggested buyers from countries friendly to Russia could pay in their own fiat currencies — or in bitcoin.

Gopinath said the impact of the Ukraine conflict should also spur the adoption of cryptocurrencies and stablecoins globally. But she warned there is a lack of regulation around digital currencies that needs to be tackled first. 

"All of these will get even greater attention following the recent episodes, which draws us to the question of international regulation," she said. 

Read more: Amy Wu heads up FTX's monster $2 billion venture operation. She breaks down the big bets they are making for a cross-chain future — and why GameFi will become a niche category for crypto whales

Originally published on Mises Institute.

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