The anti-dollar axis
Russian forces are now seizing territory across Ukraine, shelling military and civilian targets, and creeping closer to capturing the capital, Kyiv. The international response to Russian President Vladimir Putin’s invasion has been furious, and U.S. allies are united against the invasion. U.S. President Joe Biden has led the international community in slapping punitive sanctions on Russian elites and firms with the intention of crippling the Russian economy and forcing a change of course. But so far, these measures have failed to compel Russia to accept a cease-fire or to withdraw.
The war is barely ten days old, and it remains to be seen what Putin will do if and when sanctions stoke greater public discontent in Russia. But these punitive sanctions may also backfire in another way. Biden’s flexing of American economic muscle will only embolden Russia and other U.S. rivals, notably China, to deprive the United States of the very power that makes sanctions so devastating. Russia and China will expedite initiatives to “de-dollarize” their economies, building alternative financial institutions and structures that both protect themselves from sanctions and threaten the U.S. dollar’s status as the world’s dominant currency. Without concerted action, the United States will struggle to reverse this movement and see the weakening of its global standing.
The U.S. dollar’s preeminence in the global financial system, backed by vibrant U.S. markets and unmatched U.S. military strength, makes any sanctions imposed by Washington formidable. No other currencies, the euro and the yuan included, have come close to dethroning the dollar from its primary position in the global economy and in international financial markets. The dollar is the most widely held reserve currency in the world. It is the main invoicing currency in international trade and the leading currency across global financial institutions. It dominates global equity markets, commodities markets, development finance, bank deposits, and global corporate borrowing. In times of crisis, people around the world turn to the dollar as their first choice of a safe-haven currency. U.S. sanctions effectively amputate the financial power of a foreign aggressor, preventing it from raising capital in global markets to bankroll its activities.
Russia might be the most outspoken champion of throwing off the yoke of the dollar, but its agenda has great appeal among major powers. China’s commitment to diversifying its foreign exchange reserves, encouraging more transactions in yuan, and reforming the global currency system through changes in the International Monetary Fund further buttresses Russia’s strategy. Deteriorating U.S.-Chinese relations incentivize Beijing to join with Moscow in building a credible global financial system that excludes the United States. Such a system will attract countries under U.S. sanctions. It would even appeal to major U.S. allies who hope to promote their own currencies to the detriment of the dollar. When imposing sanctions, the Biden administration must not just consider how these measures will shape the war in Ukraine but also how they might transform the global financial system.
