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Possible End to Dollar Dominance?: Permanent Alterations to the World Order Post-Ukraine

Sanctions for years against countries like Cuba, Libya, Iraq, North Korea and so on hurt these economies significantly, but strengthened the regimes and their anti-America discourse, being dislodged only after the use of physical intervention. 

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Time will tell whether Putin wins the sweepstakes of expansionism or the cost of economic distress eventually overwhelms Russia and him. However, some interesting shifts in geo-strategy are discernible and permanent, regardless of whether Putin wins or doesn’t.

First, these sanctions, SWIFT restrictions, collaring at the UN’s various rights bodies, potential expulsion from Financial Action Task Force (FATF), measures at the World Health Organisation (WHO), World Trade Organization (WTO), and so on, will sustain for long, whether Russian troops stay, return or support a new regime in Kyiv. Putin will have to adjust his economics, exports, imports and travels accordingly.

The impact in the immediate run is debilitating, as seen from the crash in the Rouble and stocks, the sudden six-level down junk rating to B and the desperate doubling of the interest rate. However, sanctions for years against Cuba, Libya, Iraq, North Korea (DPRK), Serbia, Venezuela and Iran hurt these economies significantly, but strengthened the regimes and their anti-America discourse, being dislodged only after the use of physical intervention. 

However, Putin has friends and several inelastic commercial clients for oil and gas. Some oil friends produce a large section of the world’s oil, namely Saudi Arabia, Venezuela and Iran, each of whom would welcome a stronger and more profitable Organization of the Petroleum Exporting Countries (OPEC) Plus cartel. Biden’s snub to Mohammed bin Salman Al Saud (MBS) and the latter’s close ties to a resurgent Trump could be a factor in OPEC refusing to raise output immediately, deciding to stick to the already-announced rise of 0.4 MMB/D from April 1.

Sheikh Mohamed bin Zayed (MBZ) of the UAE, a strong voice in the Middle East and Organisation of Islamic Cooperation (OIC) matters, has also abstained as at least two times from UN resolutions. 

Also read: Russia-Ukraine: Fuel Prices, Fertiliser Subsidies Are India’s Two Initial Economic Challenges

Western media is disregarding other rabbits in Putin’s counter-sanctions hat, which he could choose to use, contrary to the global chorus of Putin looking for an off ramp. Putin controls under half the world’s palladium, critical for semiconductor chips; along with Ukraine he controls a quarter of the world’s wheat; and 15% of EU’s natural gas is Russian and already at sky-high prices, two times more than those post-pandemic.

Smaller issues like manufacture and sale of automobiles in Russia and Ukraine have already hit the industry with a sledge hammer, EU-maker sales expected to drop by 1.5 million units in this year. Serious concerns have been raised by aircraft leasing companies, which have leased out more than 500 aircraft to Russian airlines.

Second, Putin is now much more dependent on a resurgent and equally belligerent – though more circumspect – China. With border disputes resolved and a common enemy in sight, closer cooperation on trade, investments and currency can be expected.

Several attempts are visible at sowing discord between the two by raising Vladivostok and Chinese superiority as impediments, but there are no such signs in public or private, except for the fact that China too was blindsided by the attack on Ukraine, not having moved its students out before the invasion. Russia will rely more on China for economic partnership, possibly creating more business opportunities for China.

Such forced cooperation has the potential to lead to more yuan-rouble trade and an significant energy-metal bubble, with a technological edge in weaponry, cyber-warfare, electronic warfare, bio-warfare, nuclear cooperation and the end of dominance of the US dollar. The possible return of Trump in 2024 could de-globalise the world again, for sure this time, making more way for China-Russia expansionism, economic and otherwise.

Third, the US dollar has committed possible harakiri regarding its image as a safe haven. For so many decades, the US Federal Reserve prided itself in stating that every single dollar ever printed is backed by the sovereign and will be honoured. However, ‘Bidenism’ killed this promise twice over – by freezing half of Afghanistan’s seven billion dollar-denominated foreign exchange reserves and all of Russia’s foreign exchange dollars. Any central bank will now think several times before buying US treasuries and will always look for alternative safe assets, even if they are a shade less safe.

In two decades, the Euro has emerged as a safe asset and attracted 30% of Russian foreign exchange reserves, 10% each in Germany and France. With 23% reserves in gold, 13% in yuan and 10% in Germany, Putin seems to have hedged well when he started drawing down reserves in the US from 2016-17, down to almost zero in 2021.

Fourthly, China will continue to draw down its US dollar-denominated foreign exchange reserves of about $1 trillion in its war chest of $3.4 trillion. Since 2005, China’s share of dollar securities has fallen from 80% to just 30%.

The US’s consistent targeting of Chinese foreign exchange reserves and foreign exchange management, by naming it a ‘currency manipulator’, and its recent last-recourse to economic sanctions, is not lost on Chinese strategists. Even though the Yuan forms only about 3-5% of world trade, the trajectory, through trade-expansionism into EU, South America, Africa and Regional Comprehensive Economic Partnership (RCEP) nations, is clear.

Coupled with the largest quantum of national central bank digital currency (CBDCs or e-yuans) already issued, possibilities of a yuan-inspired undeclared non-dollar bloc of nations are becoming realistic

Fifthly, Asian and African central banks will be getting to their drawing boards to reassess their reliance on US dollar, safe havens, trade dependencies and reliability or not of the American hand. Given the subtle yet silent (but not very comforting) support from the US over Chinese aggression, India’s sustained abstentions on anti-Russia resolutions are very strong statements of support. That too, despite sustained pressure from the EU and US.

Also read: ‘Disappointed Over UN Show’: US Lawmakers Call on India to Distance Itself From Russia

These US sanctions and consistent use of soft weapons, like NGOs, have not really gone down well with the Indian establishment. Ukraine may have just extracted India from the western grasp finally and pushed it back into the RIC (Russia, India, China) Forum, with a non-aligned tag, albeit with a niggling boulder-sized Ladakh problem.

Vaishali Basu Sharma is an analyst on strategic and economic affairs. She has worked as a consultant with the National Security Council Secretariat for nearly a decade.