Accelerated de-dollarization

JIN DING/CHINA DAILY

US-led West's sanctions against Russia are reshaping the global financial landscape

The major Western powers are employing financial sanctions as economic weapons. As the conflict between Russia and Ukraine escalates, the United States and its Western allies have imposed what they hope will be crippling financial sanctions on Russia. These are promoting changes in the international financial order and driving profound changes in the international monetary system and the global financial landscape.

Since the start of the conflict, the US and its allies have imposed all-round, indiscriminate and unprecedented sanctions on Russia, especially financial sanctions. They have frozen the overseas assets of the Central Bank of Russia, kept Russia's major banks out of the Society for Worldwide Interbank Financial Telecommunication, restricted financing to Russian financial institutions and other leading companies in Russia, and dumped Russian financial assets. The countries have also downgraded Russia's sovereign credit rating to junk, and imposed menu-based sanctions on the Ministry of Finance of the Russian Federation, the Central Bank of the Russian Federation and the National Wealth Fund of the Russian Federation. The US Department of the Treasury has prohibited dollar debt payments to be made from Russian government accounts at US financial institutions to shake Russia's financial infrastructure, crack down on its financial system, cut off the channel of using US dollars and weaken its overseas financing and self-reliance.

Affected by the sanctions, the Russian financial market has experienced strong turbulence. Russia could face the risk of a debt default as it is unable to enter the international debt payment market. The US has imposed more than 8,000 sanctions on Russia since the Crimea crisis in 2014.Under the long-term sanctions, Russia has pushed ahead with de-dollarization, which has acted as a shield against the financial sanctions to some extent. However, the sanctions this time have still caused heavy losses to the Russian economy and finance.

The Russia-Ukraine conflict has involved both geopolitical and currency battles. The international monetary system has been shaken amid the changes in the international currency landscape. The US dollar accounts for 40 percent of international payments and 59 percent of global reserve currency holdings. The hegemony of the US dollar will remain in the short term. But with the US and its allies having weaponized finance and frozen Russia's reserve assets of hundreds of billions of dollars, it has cast a shadow over the stability and reliability of the international monetary and financial system, and triggered doubts about the security of risk-free reserve assets. The practices have challenged the global payment and reserve system. The profound restructuring of the international financial landscape will be accelerated.

First, de-dollarization of the international reserve currency landscape will accelerate. The unprecedented sanctions imposed by the US and its allies on Russia have fully exposed the defects of the global economic system's over-reliance on the US dollar and the US financial system. Countries will prioritize the security of reserve assets, and even reduce the proportion of US dollars in their foreign exchange reserves, diversifying their foreign exchange reserves, settlement currencies and payment systems, and exploring multi-currency transactions in key fields such as energy and food. This will accelerate de-dollarization and shake the current international financial system.

To cope with the sanctions, Russia has announced it requires direct payment in rubles for energy and commodities sold to "unfriendly countries", as it accelerates its decoupling from the US dollar and the financial systems of the US and European countries. The central bank of India is exploring the development of a rupee-ruble trade payment mechanism with the central bank of Russia to bypass the dollar. Saudi Arabia is also negotiating with China to denominate part of its oil sold to China in renminbi. A total of 17 percent of Sino-Russian bilateral trade is already settled in renminbi. The conflict between Russia and Ukraine and the sanctions against Russia will push renminbi settlement and payment to rise. The new strategies of emerging economies will weaken the dollar's dominant status in the global oil market and put great pressure on the petrodollar system.

Second, the flow of international funds will diversify and global credit and debt will become more scattered. Financial sanctions will change the global flow of funds and asset allocation structure greatly. The flow of international funds from Wall Street to other international financial centers will accelerate. Financial sanctions against Russia will fragment the global credit and debt structure. To ensure security, companies and financial institutions in Asia, Latin America and Africa are likely to reduce financing in US dollars to reduce the risk of being attacked by the US and European countries. Global cross-border fund flows in which the US dollar and euro dominate will see more diverse currency circulations. Foreign financial assets will flow to trusted regions and even return to domestic markets.

And third, the credibility of SWIFT as global financial infrastructure has been severely challenged. Sanctions have made the neutrality of the global quasi-financial infrastructure be questioned, which has prompted countries to seek alternatives and boosted the development of global non-SWIFT payment and settlement systems. Bilateral or small multilateral payment and settlement systems are taking shape. More than 20 countries have established independent financial clearing systems. The crisis has driven the establishment of new payment and settlement systems in major energy trading countries. Once the new payment and settlement landscape takes shape, the proportion of the US dollar in payment and settlement will further decline, and two or more sets of payment and settlement rules and standards will emerge. De-politicization will be a major consideration for countries to choose payment and settlement channels, which will accelerate the restructuring of the international monetary system and the global financial order.

The author is a lead researcher at the Department of American and European Studies at the China Center for International Economic Exchanges. The author contributed this article to China Watch, a think tank powered by China Daily.

The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn