Active defense

The weaponizing of the dollar has stimulated the search for alternatives

SONG CHEN/CHINA DAILY

There have long been contradictions between the imperfect international monetary system and the demands of sovereign countries for an international currency that serves the purposes of settlement, valuation and saving in a continuous and stable manner. As revealed by the Triffin Dilemma, while the United States provides liquidity to the world to meet trading demands, its long-term deficit in balance of payments brings instability to the value of the dollar.

After the conflict between Russia and Ukraine broke out, the dollar has been weaponized to pose sanctions against Russia. The fallout from the imperfect international monetary system has been further exposed by unstable currency values and negative policy spillovers. Consequently, sovereign countries will accelerate their search for alternatives to the US dollar in order to address their transaction demands in a more secured manner.

It is fair to say that the dollar's international status, underpinned by the US' economic strength, technology capacity and currency use network, will not be fundamentally shaken in the short term, but countries are exploring alternatives.

One alternative is to clearly stipulate that commodities can only be traded in other sovereign currencies, such as the ruble settlement order Russia has introduced in response to US sanctions. This regulation, which links the currency to physical resources, represents an open de-dollarization effort, which will help stabilize the exchange rate of the ruble and domestic prices in Russia over the short term. However, if a single country does not monopolize the supply of physical resources, or lacks stable trading partners, it will adversely affect the demand for its resources in the international market. For example, if the European Union sticks to its plan to end the use of Russian oil and gas by 2027, there is great uncertainty if the ruble settlement order will be effective in the long run.

The second alternative is to establish a trading platform that does not go through the SWIFT system, such as the Instrument in Support of Trade Exchanges, or INSTEX, jointly established by France, Germany, the United Kingdom and other European countries. In May 2018, after then US president Donald Trump reimposed economic sanctions on Iran, the European countries tried to establish an alternative mechanism that avoids the use of the dollar to re-enforce trade with Iran. However, after nearly three years of operations, the scale and scope of INSTEX have not been significantly expanded. Its first transaction so far took place in March 2020 when an export of medical equipment was conducted on humanitarian grounds. The fact that the mechanism has not been widely used stems from the strong criticism of the US and a lack of determination from the EU to completely give up on SWIFT and adopt the new mechanism.

The third alternative is digital crypto currencies, a new option made possible by the rise of blockchain technology. The limited supply of crypto currencies is attractive in concept, especially after the US and other developed countries have greatly increased their money supply in recent years, the irresponsible behaviors make investors consider crypto currencies as a new store of value. Meanwhile, their decentralized feature makes it difficult for them to be controlled by a central node, and their strengths in privacy and security can help owners evade dollar sanctions. However, there are many deficiencies in this new type of currency. On the one hand, their wild price swings makes it difficult for them to act as a stable medium of exchange. This year, the total value of the crypto currency market has shrunk to less than $1 trillion, and the price of bitcoin has fallen by 65 percent. On the other hand, many sovereign nations oppose or resist the use of crypto currencies. China has clearly outlawed crypto currency transactions, while India and Venezuela have also begun to impose substantial taxes on crypto currency transactions.

While not denying that current alternatives have some weaknesses, we should not assume that they are unchangeable in the future. Although there is no option that can directly revise the international monetary system, bottom-up endeavors and explorations between different nations may exert influences marginally.

Among them, whether and how the BRICS can exert influence deserves long-term attention. The Strategy for the BRICS Economic Partnership 2025 made clear the cooperation priorities, including promoting the use of local currencies in two-way payments, strengthening cooperation among BRICS countries in the payment system, and working together in the development of new financial technologies. At the national level, China has developed the Cross-Border Interbank Payment System and Russia has developed the System for Transfer of Financial Messages. The BRICS countries have explored the establishment of BRICS Pay, which makes it possible for the direct exchange of currencies of BRICS countries for international payments, thereby reducing reliance on payment organizations such as Visa and Mastercard. On June 23, the Beijing Declaration, adopted at the 14th BRICS Summit, proposed the establishment of a knowledge exchange platform in the financial sector and encouraged the five nations to explore further cooperation. Furthermore, the BRICS Plus proposal intends to expand partners for the grouping, implying that the influence and potential of BRICS cooperation should not be underestimated.

Despite the dominant position of the dollar, weaponizing the currency will further stimulate the search for alternatives. We should neither solely emphasize the strengths of dollar and ignore the challenges, nor be radical to state the collapse of dollar. Overall, the international monetary system is evolving, and we should keep watch on how it will evolve.

The author is an assistant researcher of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. 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