In the hopes of pressuring Russia to capitulate, the United States implemented a series of punitive sanctions last year, freezing a whopping $300 billion of Russia's foreign currency reserves and booting major Russian banks from the interbank messaging service used for international payments, SWIFT.
Yet, these so-called "weaponisation" of the dollar resulted in an unintended consequence -- the emergence of alternative financial infrastructures championed by America's two biggest geopolitical rivals, Russia and China. In retaliation, these countries have taken it upon themselves to establish their own financial systems, threatening to undermine the global financial dominance of the US dollar. The year-long conflict between Ukraine and Russia has had far-reaching consequences, creating significant changes in economic, geopolitical, and cultural spheres worldwide.
But perhaps the most profound effect has been the push towards multipolarity, away from the concentration of global economic power in a single hegemonic force. For over 80 years, the US dollar has dominated the financial world since the end of World War II, but now the conflict in the backyard of Europe has spurred de-dollarisation, shifting the trend into reverse. The push for de-dollarisation is not limited to China and Russia. Rather, it is a worldwide movement, with nations and regions such as India, Argentina, Brazil, South Africa, the Middle East, and Southeast Asia.
While the euro's share of global reserves has only modestly increased, from 18% to just under 20%, the Chinese renminbi (RMB/yuan) has rapidly gained traction, despite accounting for less than 3% of global reserve currency holdings.
The fear of the United States using its currency to impose devastating sanctions on them, as it did on Russia, is at the heart of the de-dollarisation, which has accelerated in recent years. Central banks around the world held less than 59% of their foreign exchange reserves in dollars in the final quarter of 2022, down from 70% in 2000.
The rapid appreciation of the dollar plays has had far-reaching implications for countries around the world. One huge impact is dollar-denominated debt, which has become far more expensive to repay when the greenback surges in value.
Smaller economies have become increasingly cautious about their exposure to dollar-denominated debt and have turned towards alternative currencies. This trend has been further propelled by a drive to enhance regional trade links. The surge in the dollar's value has also resulted in a substantial increase in the cost of importing essential commodities such as fuel and food.
Asian nations are facing heightened vulnerability in their markets. To address this issue, talks have begun exploring the establishment of the Asian Monetary Fund (AMF), which would offer protection for these nations. The proposal for the AMF is a strategic move, and Malaysian Prime Minister Datuk Seri Anwar Ibrahim has recently sparked much discussion after disclosing that he met with Chinese President Xi Jinping to discuss the AMF in their last meeting at Hainan in recent March.
The Brics nations -- stands for Brazil, Russia, India, China, and South Africa, are prepared to introduce a new currency initiative during the upcoming Brics summit in Durban, South Africa this August. The first step is the transition to settlements in national currencies. The next step is to introduce a new currency in the form of digital or any other innovative currency in the near future.
A potential sell-off of the dollar could have significant implications for the global economy, particularly for emerging markets. As the value of the dollar declines, commodities such as oil and gold, which are priced in dollars, will become more affordable for buyers using other currencies, thus increasing demand for these exports. Additionally, the strong dollar has made it challenging for emerging markets to service their dollar-denominated debts, but a weakened dollar could make these debts more manageable. Furthermore, if the value of their own currencies increases relative to the dollar, emerging markets could experience a decrease in inflation rates.
The trend towards de-dollarisation is gaining traction as more countries look to reduce their reliance on the US currency for international trade. China and India, among others, have already started trading with Russia in their own currencies, bypassing the dollar altogether. This has led to speculation that the international trading order could gradually shift away from the dollar in the coming years. In fact, Brazil and China have recently begun trading in yuan, which is helping to establish the Chinese currency as a potential challenger to the dollar in the commodities market. The trend towards de-dollarisation is a vital response to the challenges posed by sanctions, changing trade dynamics, and unpredictable currency markets. After all, all nations are grappling with these issues and seeking ways to insulate themselves from the uncertainties of the global economy while forging a path towards greater stability and prosperity.
Dr Imran Khalid is a freelance contributor based in Karachi, Pakistan.
