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By VELIA GOVAERE - Professor UNED
Impossible to foresee, the impacts of the Russian invasion of Ukraine, like a Pandora's box, are unleashing their fury on the fundamental foundations of the international order. Waves of refugees, destruction of cities, desolation and death are self-evident damages. The food and energy crises and the resurgence of world inflation are serious but foreseeable consequences. A possible uncoupling of globalization is another disaster that has been foreseen since the beginning of the hostilities. But there is an unknown dimension that has the potential to turn against those who conjure it up.
According to David Bounie of the Institut Polytechnique de Paris, "The war in Ukraine is accelerating a process of monetary balkanization" (Le Monde, 1/06/2022). The deployment of U.S. economic muscle may end up undermining for the U.S. the very financial power that makes its sanctions so devastating. Indeed, financial punishment can have unforeseeable consequences.
On May 10, Kristalina Georgieva, managing director of the IMF, warned of signs of exhaustion in the international monetary system anchored to the dollar since 1944 at Bretton Woods. The cornerstone of the international financial system, the dollar is the reserve currency par excellence. The main means of invoicing and payment for financial institutions, it dominates the stock and commodities markets. Its possession determines the confidence in bank deposits and rates the indebtedness of countries and companies. In times of distress, the dollar is resorted to as a safe haven. It can be said that the dollar is an international public good that is indispensable for global financial stability. Therefore, there is no way to exaggerate the risk of jeopardizing its standing.
But the dollar is the currency of the United States and through it it wields financial hegemony. That is why it has been easy to be tempted to extend that strength to the geopolitical plane as a national instrument of its own agenda, even of war. Several U.S. governments have already embarked on the dangerous path of pursuing foreign policy objectives with the imposition of economic sanctions using the preeminence of its currency. It did it first with Cuba and, despite not having obtained the expected results, it did it again with Iran. But those countries did not have enough weight to defend themselves monetarily and, even less, to make the financial punishment they received counterproductive.
Another story began when Russia was targeted by the dollar attack as a punitive instrument. In 2014, after the annexation of Crimea, Obama focused financial sanctions against large banks, energy companies, defense corporations and Russian oligarchs. Russia took notice of the risk posed by its dependence on the dollar and began a monetary decoupling effort.
Putin warned as early as October 2018 that the dollar monopoly was "unreliable" and therefore "dangerous." In the same act, he established a roadmap to limit Russian exposure to future sanctions. He put in place two financial infrastructures: a national payment system, a Russian alternative to platforms such as Visa and Mastercard, and a Russian version of SWIFT, which he called the System for Transferring Financial Messages (SPFS).
As a second step, he radically reduced, with gold, euros and yuan, the proportion of dollars in Russian reserves. It also gradually got rid of U.S. Treasury bonds. The main Russian energy companies switched to transacting their operations in rubles, yuan and euros. A state-backed Russian cryptocurrency was also designed to circumvent the use of the dollar. By 2020, more than 83% of Russian exports to China were already transacted in euros. Recently, Russia and China signed a 30-year contract to transact gas sales from a future pipeline in euros.
All this is understandable. So far Putin's measures are to be expected as defensive processes with uncertain outcomes and no major immediate impact on the international order. The problem is starting to get much more sobering with warnings from U.S. spokespersons of eventually involving China in these measures. In the event that China were to help Russia circumvent the sanctions, it is prevented from being included in the punishment. Such a deterrent threat to Beijing conjures up unintended effects that may be irreversible.
According to Zongyuan Zoe Liu and Mihaela Papa of Foreign Affairs, this combines with the increasingly deteriorating relations between China and the United States and "threatens in the long run the dollar's dominant role in international trade" (7/03/2022). Thus may emerge what they call an "anti-dollar geopolitical axis." The war in Ukraine unleashes a process whose trend may affect the geopolitical power of that currency. "The U.S. government must be aware of the unintended consequences of its policy," insists Foreign Affairs. In its opinion, "if, in the short term, tighter sanctions against Russia could help Ukraine, they undoubtedly initiate conditions for a broader de-dollarization movement."
After all, economic and financial sanctions, like any other weapon, are useful until they are no longer effective, and then the whole world will have to face the harsh reality of a weakened dollar. David Bounie warns that "the United States and its allies are introducing, for political purposes, a hostage-taking of the payment systems, when they should be, on the contrary, a collective good and not a tool for exclusion". Doing so in the midst of international inflation, in the throes of a recession and in the midst of a food crisis can only aggravate the living conditions of all.
Goethe warned in The Sorcerer's Apprentice: "one should not conjure up forces that one does not know how to control later". All the more reason to smooth things over and counteract the atmosphere of discord that is pushing us towards a financial decoupling whose impacts cannot even be imagined.
