The most important element in the debate over the utility of Western sanctions against Russia, is also the most ignored. The sanctions regime mostly comprises of restrictions that have been deployed before, such as export bans and the freezing of certain assets. Even the controversial exclusion of a number of Russian banks from the main international banking message system, SWIFT, was not exceptional, having already been used against Iran.
But the freezing of Russia’s foreign-exchange reserves, worth around $300 billion — about half of its overall reserves — was significant. While the US had behaved similarly with Afghanistan, Iran, Syria and Venezuela, none of these targets was remotely as powerful as Russia: a member of the G20, and the world’s largest nuclear power. Likewise, none of the 63 central banks that are members of the Bank for International Settlements (BIS) in Basel — known as the central bank of central banks — had ever been the target of financial sanctions, not even during the Second World War.
At the time, the decision received relatively little attention. Future historians, however, will look back on it as the trigger that set in motion one of the biggest snowball effects in history, one which now threatens the very foundations of the American Empire.
In our age of fiat money, reserves aren’t held in the form of physical dollars (or other currencies) stashed in the vaults of foreign central banks. They are simple IOUs — a credit recorded in the accounting sheets of the Federal Reserve and other central banks. In the dealings between countries, just as in the dealings between individuals or companies and commercial banks, trust is therefore fundamental: just as you would never deposit your salary in a bank if you had even the remotest fear that it might freeze or confiscate your money, no country wants to hold reserves which may be snatched away at any moment.
This move, therefore, violated an almost sacred principle: the neutrality of international reserves. The message was clear: from now on, the US would stop at nothing to punish countries that stepped out of line or defied Western diktats. And if this could happen to Russia, a major power whose central bank reserves were mostly earnings from sales to the West, it could happen to anyone. As Wolfgang Münchau wrote, by weaponising international reserves, the US had “taken the biggest gamble in the history of economic warfare”. In one fell swoop, he noted, the US had “undermined trust in the US dollar as the world’s main reserve currency”, and encouraged China and Russia to “bypass the Western financial infrastructure”. For non-Western nations — especially China, which is heavily exposed to US assets — disengaging from the dollar, and more in general from the US-led international monetary and financial system, acquired a sudden urgency.
De-dollarisation was not something that would happen overnight, that much was clear. But the wheels of history were set in motion. It is no coincidence that most of the world’s nations didn’t join the West in slapping sanctions on Russia, but quietly started strengthening their ties with Russia and China in an effort to reduce their dependence on the dollar-centric system. In just over 12 months, the world has undergone a greater tectonic shift, in geopolitical terms, than it has in decades: the long-heralded post-Western international order — comprising the BRICS and dozens of other countries making up most of the world’s population — has finally become a reality. The US, as former Treasury Secretary Larry Summers recently said, is lonelier than it has ever been.
A key driver of this process has been the world’s gradual disengagement from the dollar. Its demise has been endlessly — and wrongly — predicted since the Sixties, so scepticism here is justified. This time, however, there is good reason to believe that it’s happening. De-dollarisation comes in many forms, but three are particularly easy to spot: the settling of international transactions in currencies other than the dollar, primarily the Chinese yuan; the reduction of the dollar in global foreign-exchange reserves; and the decline in foreign holdings of US Treasury bonds.
On all counts, the trend seems clear. In terms of international payments, the role of the yuan (and other currencies) has received a massive boost over the past year. The most obvious example is Russia, which has effectively been forced by the Western sanctions to embrace the yuan for most of its international transactions. But several other major countries — including Brazil, Argentina, Pakistan and Bangladesh — have already agreed to (or are in the process of negotiating) the use of the yuan or their own currencies to settle their international transactions. Meanwhile, the BRICS are also working on developing an international currency along the lines of the synthetic alternative proposed by Keynes 70 years ago, the bancor, which was rejected by the Americans in favour of a system anchored around their dollar.
Beyond the BRICS, interest in de-dollarising — or at least in greater use of local currencies — is also growing, most notably in the Persian Gulf, where the US previously wielded unrivalled strategic power. At the first China-Gulf Arab States Cooperation Council summit in December reached a consensus to use yuan for oil and gas trade. And last month, China and the UAE conducted their first transaction in yuan.
Looking at the composition of global currency reserves, the shift towards de-dollarisation might be less apparent. But it is happening. The nothing-to-see-here crowd might point out that the US dollar still dominates the world’s currency reserves, with around 60% of the total, while the yuan accounts for less than 3%. But static snapshots of the present, though true, are of little use in understanding what the future holds. And, according to current trends, the dollar’s share of reserve currencies has begun to contract at 10 times the average speed of the past two decades. Central banks are mostly dumping dollars for gold, while overseas creditors — China, Japan and Saudi Arabia in particular — are increasingly selling off US Treasury bonds.
Such is the progress of de-dollarisation that many in the Western policy establishment are starting to acknowledge that this time is different. Last week, for instance, US Treasury Secretary Janet Yellen admitted that the weaponisation of the dollar through the use of financial sanctions risked undermining its hegemony by pushing countries to look for an alternative, even if its supremacy wasn’t at risk soon. Just two days later, Christine Lagarde, the President of the ECB, made a similar statement, acknowledging that there was now “an opportunity for certain countries seeking to reduce their dependence on Western payment systems and currency frameworks”. She stressed that these changes do not amount to an “imminent loss of dominance for the US dollar or the euro”, but they do “suggest that international currency status should no longer be taken for granted”. The question, then, is no longer if de-dollarisation is happening — but how fast.
Courtesy: Unherd
