Geopolitical risks that were unimaginable just a few years back are turning the idea of reliable currencies and global financial centres upside down. The countries that created and controlled the existing global financial system in mid-20th century, receiving global rent or seigniorage in the process, have dealt the most devastating blow to their own system, writes Valdai Club expert Alexander Losev.
The unparalleled financial sanctions imposed on Russia threaten to gradually erode the US dollar and could result in a more fragmented international monetary system, IMF First Deputy Managing Director Gita Gopinath said in an interview with the Financial Times in late March 2022.
Experts from the Institute for the Analysis of Global Security (IAGS) agree with the IMF and also argue that the extremes to which Washington has gone in an effort to punish Russia have made other states realise the importance of moving beyond any dependence on the US dollar and a financial system backed by the United States. IAGS Director Dr Gal Luft told CNBC that “Washington's trigger-happy sanctions” on Russia mean that the “central banks are beginning to ask questions if putting all their eggs in one basket” and relying heavily on the dollar is a smart idea. The United States has also imposed similar sanctions on Cuba, Iran, Venezuela and Afghanistan, thus putting these countries’ economies in a difficult situation.
The dollar remains the main global reserve currency and that’s why the distribution of cash and capital flows around the world are largely determined by monetary and economic cycles in the United States. The point is that with the US national currency being used for both domestic circulation and also for servicing significant amounts of international transactions and the accumulation of reserves by the central banks in other countries, there has to be as many dollars in circulation outside the United States, so that America can import as many goods and services as possible in exchange for its dollars, that is, export dollars, the supply of which, in turn, depends on the US Federal Reserve’s monetary policy and the volume and healthy condition of the US consumer market. However, this creates a negative trade balance and pushes up US national debt because the Fed issues non-cash dollars in exchange for Treasury bonds.
In order to expedite international settlements and to promote global economic growth, the balance of payment deficits in the United States and the debt of the US government, banks, corporations and households must constantly increase because consumption expansion usually follows credit expansion. That was the model of modern financial supercapitalism. Clearly, this cannot continue indefinitely. Financial system imbalances and measures to combat record high inflation, quantitative tightening by the US Federal Reserve, a recession in the US economy and the early phases of the debt crisis will take a significant amount of “external” dollars out of the global financial system. The shortfall in the main settlement currency in regional trade can only be replaced by the national currencies of the countries involved in this trade.
Thus, processes that stimulate the widespread transition to transactions in national currencies are now beginning to unfold in the global economy. The countries that already are under US and EU sanctions, as well as countries that feel threatened by Washington, are trying to avoid settlements in US dollars, to stop accumulating reserves in US dollars and euros and, if possible, to withdraw their funds from assets located in the United States and the EU. Geopolitical risks are forcing countries to convert to national currencies in transactions and to create alternative payment systems.
Countries that are concerned about importing inflation from the United States and the Fed with its monetary tightening which can reduce the supply of dollars are also trying to convert to transactions in the strongest available regional currency in accordance with the cross-border trade structure. So, as of late 2021, the Chinese yuan ranked fourth in terms of its share in international transactions.