Russia and China are out to undermine the US dollar, and if they succeed it will change the world for ever

America’s superpower status is cemented by the global might of the dollar, but a growing movement aims to build a new financial order.

Michael Day writes:

There is only one true superpower. Since the end of the Second World War, we’ve seen the United States bestride the world like a colossus.

What makes the US such a potent ally and formidable adversary? Its nuclear arsenal? This helps. As does its incomparable navy and huge, hi-tech army. The soft power from its ubiquitous contributions to culture is clearly important. But none of these really explains America’s unique ability to project power globally. This is conferred by the mighty US dollar.

Its status as the undisputed reserve currency (it accounts for around 60 per cent of world reserves, compared with just 20 per cent for its nearest rival, the euro) means that Washington’s tendrils extend into almost all banks and financial institutions.

Few, if any, major companies are safe from its influence. As a result, the US can slap crushing financial sanctions on foreign firms or governments anywhere in the world.

Look closely at a dollar bill, however, and you’ll see there’s a target on its back – a target brought into sharper relief by events in Ukraine and the West’s reaction to them. Russia and China are gunning for it. If they can end the dollar’s primacy with a mix of digital and cryptocurrencies and alternative payment systems, US supremacy will end, too – and the world will change for ever.

UKRAINE – 2020/10/08: In this photo illustration a 1 dollar bill with various dollar bills. (Photo Illustration by Igor Golovniov/SOPA Images/LightRocket via Getty Images)
The dollar has been the world’s reserve currency since 1944 (Photo: Igor Golovniov/SOPA Images/LightRocket/Getty)
A golden opportunity

The dollar has been the world’s reserve currency since 1944, when the US and its allies, planning for post-Second World War construction, agreed at the Bretton Woods Conference to peg the American currency to the rate of $35 per ounce of gold.

The next inflection point arrived in 1971 when Richard Nixon allowed the dollar’s value to fluctuate; its extraordinary popularity meant America no longer had enough gold to back it, and Japan’s and West Germany’s exports soared on the weakness of their own currencies.

The dollar’s primacy among currencies has remained unchallenged, to the disdain of some. In the 60s, France’s finance minister (and later president) Valéry Giscard d’Estaing declared that the dollar’s status as the leading reserve currency was the “exorbitant privilege” of the United States.

The world’s appetite for dollars provided cheap financing for US investment abroad. Decade after decade, the world’s largest economy has enjoyed low interest rates and a government that is able to fund budget deficits in perpetuity.

Of more concern to the rest of the world is how the dollar’s outsize role in international trade can hurt the global economy. As a country’s currency weakens, its exports should become cheaper and therefore more competitive. But because so much trade in other countries is conducted in US dollars, smaller countries do not always see this benefit when their own currency depreciates.

The International Monetary Fund (IMF) has suggested this phenomenon has exacerbated the economic crisis caused by the Covid-19 pandemic.

Fines and sanctions

What’s not in doubt is how the dollar’s dominance in the global credit system supercharges the power of US financial sanctions. Almost all trade done in US dollars – even trade between other countries – can be subject to US sanctions, because they are handled by correspondent banks with accounts at the US Federal Reserve. By cutting off the ability to transact in dollars, the United States can halt an organisation’s ability to do business.

The colossal $9bn (£7bn) fine that Washington levied on the French bank BNP Paribas in 2014, for dealing with Sudan and Cuba in defiance of US sanctions, was a stark illustration of this power. BNP Paribas had no choice but to comply. Big companies cannot function unless they are able to access the global market for dollars. And this cannot be done if an institution falls out with US regulators.

Then-US president Donald Trump and Chinese leader Xi Jinping at a meeting in Florida in 2017 (Jim Watson/AFP/Getty)
In this vein, significant impetus for the world to ditch the dollar has come not only from America’s autocratic enemies but as a result of its own actions.

The shock presidency of Donald Trump called into question whether even America’s traditional allies benefited from its global financial power. Between bouts of cosying up to then attacking China and Russia, Trump alienated his key European allies, even to a degree, the UK. Europe, led by France, has talked about resisting US financial power.

In terms of its economic size, the EU is on a par with the US. But political fault lines within Europe and the might of the US dollar limit its ability to take on Washington.

This weakness was brutally exposed following the Trump administration’s withdrawal from the Iran nuclear containment deal in May 2018. Britain, France and Germany were adamant the accord was needed to prevent an atomic arms race in the Middle East. But the threat of secondary US sanctions meant that European firms had to stop trading with Iran.

The Trump presidency may or may not have been an aberration (events in 2024 will tell). But it has made even America’s friends consider the dangers of their dependence on the dollar.

Trump is gone – for now. And with events in Ukraine focusing minds on the need for security and stability, the West is banding together. Conversely, America’s old enemies are more determined than ever to end its status as the financial superpower.

Cryptocurrencies could help bring about the end of the dollar’s primacy, some believe (Photo: Jack Guez/AFP/Getty)
Russian resentment of the dollar has been growing since 2014, when its invasion of Donbas and Crimea provoked sanctions from the Obama administration. Beijing’s determination to resist the US dollar went up a gear following the trade war and sanctions it endured during its spat in 2018 with the Trump administration. The war in Ukraine looks set to boost their resolve.

Many pundits say that there’s a danger that the tough US-led sanctions in response to the Ukraine crisis – while wounding Russia now – will ultimately strengthen the de-dollarisation movement and end US global leadership.

A new financial order

Analysts are now talking about a “turning point” for the dollar. The real shock among the sanctions dumped on Russia following its attack on Ukraine has been America’s move to stop Russia’s central bank from accessing its foreign currency reserves; with the UK, Europe and Japan on board, more than half of Moscow’s $630bn war chest accrued in foreign banks, used to prop up the rouble in times of crisis, has been frozen.

“As such, it may make less and less sense for global reserve managers to hold dollars for safety, given that they could be taken away right when they’re most needed,” according to Joe Weisenthal and Tracy Alloway of Bloomberg.

Attempts by Russia and China to build a new financial order are well under way. Russia is trying to build sanction-proof alternatives to the ubiquitous Swift international payment system, which allows banks to communicate with one another.

One is a homespun alternative to Visa and Mastercard. The other is Moscow’s own messaging system – the System for Transfer of Financial Messages, or SPFS – as a rival to Swift. So far, this system has allowed Russia only very limited access to global markets.

Uncut sheets of $1 notes at the US Bureau of Engraving and Printing in Washington DC (Photo: Andrew Harrer/Bloomberg/Getty)
“These are in the early stages,” Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center, told i. He thought it would be many years before they made a big impact.

But that’s not all. Since October 2018, major Russian energy companies have stopped using the US dollar. By the end of 2020, more than 83 per cent of Russian exports to China were settled in euros.

Moscow and Beijing want other countries, some ambivalent about US ties (such as Turkey) or those with an axe to grind (such as Iran) to join their campaign against the dollar.

Russia has tried to muster further support by promoting the Brics grouping, – Brazil, China, India, Russia, and South Africa – and the Shanghai Cooperation Organisation. Brics’s New Development Bank deals in local currencies to “break away from the tyranny of hard currencies”. India, Brazil and South Africa all conspicuously failed to condemn Putin’s invasion of Ukraine.

Russia is co-operating tirelessly with China, America’s other nemesis, to reduce dependence on the dollar. In 2016, prime minister Dmitry Medvedev called for the two countries’ national payment systems to be harmonised and for direct settlements in yuan and rubles.

In February this year, Xi Jinping announced that the friendship between the two nuclear-armed autocracies was “without limits”, as China gave the tacit nod of approval for Moscow’s invasion of Ukraine, while Russia did the same for a future attack on Taiwan.

China hopes that partnership with Russia will help it build a yuan-based financial system – including Beijing’s own rival to Swift, and an alternative bank card payment system – thereby boosting the yuan’s status as a reserve currency.

The yuan (the currency’s official title is the renminbi or RMB; its units are yuan) has a very long way to go. Currently it accounts for less than 3 per cent of global reserves.

The pros and cons of sanctions

Pros
Sanctions as tools – weapons – for executing foreign policy have the advantage that they don’t kill or maim people (at least not directly) or destroy infrastructure. They can be used as warning to prevent more serious conflict.

And they work. For example, in 1966, strong US sanctions forced India to change its agricultural policies and allowed Washington to voice its displeasure over Delhi’s war with Pakistan earlier that year.

The cons
Sanctions usually need the US on board to have sufficient weight. And thanks to the mighty dollar, Washington can act unilaterally even when its allies are against them.

Sanctions can take a lot longer to work than direct military action. This month a leading Russia economist estimated that the Putin regime could hold out for eight years under current Western financial penalties.

Sanctions hurt ordinary people. Millions of Russians have seen the value of their rouble savings collapse under the weight of the current financial attacks by the West.

Currency contenders

But there are other currencies – and other types of currency. Russia is currently preparing to launch a state-backed digital currency that can bypass the dollar. Sanctioned Russian entities would be able trade directly with anybody willing to accept the digital rouble without first converting it into dollars.

After poo-pooing such systems, the US is finally having to react. On 9 March, President Joe Biden signed an executive order requiring officials to assess the risks and benefits of creating a central bank digital dollar, as well as other cryptocurrency issues.

Lipsky says that the US treasury is well aware of the moves made by hostile powers. At least nine other countries have already launched central bank digital currencies (CBDCs). “In the past six months there has been a change of heart over digital currency. They don’t want to find five years down the line that there are lots of digital currencies out there without proper regulation,” he says.

MORE FROM LONG READS

John Sweeney: ‘The atmosphere in Kyiv felt like what I’ve read about London during the Blitz’
25 July, 2022

One solution to the cost of living crisis? Making public transport free
24 July, 2022

US-China tensions threaten weaker economies, climate change and war
21 July, 2022
“Imagine a world where Russia invades Ukraine, Russian banks are shut off from the Swift banking system, but they switch over to a wholesale CBDC exchange between Russia and China,” he adds. “That’s all possible with digital currencies.”

Some potential contenders for the US dollar are not traditional currencies such as the euro or yuan. Instead, they are assets that derive their value from several others. For example, Special Drawing Rights (SDRs), created by the IMF in 1969, are a basket of currencies, including the US dollar, euro and the renminbi.

Most leading authorities think it is a matter of when, not if, the dollar is toppled. Speaking at HSBC’s Global Emerging Markets Forum in November, Barry Eichengreen, an economist at University of California, Berkeley, said: “A multipolar international monetary and financial system is coming, as the United States accounts for a declining share of the global economy.”

Robert Manning, of the Scowcroft Centre for Strategy and Security in Washington, says that “the dollar is unlikely to be dislodged in this decade”. But he adds: “Looking out to 2035-2040, the dollar is likely to be challenged by the RMB and euro, and we may see a more fragmented international financial system.”

Bloomberg pundit Robert Burgess says the end of America’s super-powered dollar “would be “earth-shattering”. In more measured terms, Manning notes the Greenback’s eclipse would “remove a key tool from US foreign policy at a time when economic statecraft is paramount”.

America, the world’s policeman, would be no more – or at least, seriously disarmed. Some might rejoice at the thought. But in the age of Putin and Xi, nuclear-armed dictators for life, perhaps we should be careful what we wish for.