The war in Ukraine is testing all the structures of global capitalism. It’s also accelerating processes of change that were already under way. One of the most widely discussed questions is whether or not the war will undermine the dominance of the US dollar. It has spawned what the economic historian Adam Tooze calls “future-orientated Finance-Fiction”.
On the face of it, this speculation might seem odd. For the United States has, alongside the European Union (EU), used its dominance of the global financial system to hit Russia as hard as possible. In particular they’ve done this by blocking the Central Bank of Russia’s access to its huge foreign exchange reserves.
But the case for the dollar’s weakening is exactly about the reaction to these financial sanctions. The US has been increasingly using sanctions to pressure regimes it doesn’t like. Its Office of Foreign Assets Control was, before this war, administering sanctions against 11,000 organisations and individuals.
The suggestion is that states will start looking to alternatives to the dollar to reduce their vulnerability. China has long been campaigning for such an alternative.
Secondly, Russia’s efforts to bypass sanctions may help to bring this alternative into existence. Vladimir Putin has turned to China’s president Xi Jinping for economic and military assistance. We’re already seeing Russian oil exports to China increase.
Growing trade between the two countries will of necessity take place in the Chinese currency, the renminbi. This could mark the start of the renminbi playing a much bigger role in the international monetary system. Coincidentally, a research paper just published by the International Monetary Fund (IMF) shows that the dollar’s share of central bank reserves fell from 71 percent in 1999 to 59 percent in 2021.
But the renminbi wasn’t the main beneficiary of this decline. These were other “non-traditional reserve currencies”, notably the Canadian and Australian dollars, the South Korean won, and the Swedish krona. As Tooze points out, these currencies all belong to what he calls the US “financial security system”. Thus their central banks are tied to their US counterpart, the Federal Reserve, through the swap lines it created after the global financial crisis.
These allow the Fed to supply these central banks with dollars in moments of financial panic. Thus they act, in Tooze’s words, as “external buttresses” of the dollar system. The example of the swap lines underlines why the dollar is so important today. Banks and industrial and commercial firms rely these days on borrowing on international markets to raise money. And these money markets mainly operate in dollars.
The US also supplies the safest financial asset, Treasury Bonds. When the financial markets freeze up the Fed steps in to flood markets with dollars. Now in recent years there has been a growth in international borrowing in renminbi, reflecting China’s huge role in world trade. But the Chinese government has also been imposing restrictions on its firms’ involvement in global financial markets, for fear of losing control of them.
It would have to make it much easier for capital to enter and exit China before its money markets could begin really to rival the dollar markets. What we are probably going to see is a degree of fragmentation of the global financial system. China has an interest in encouraging trade and investment in renminbi, not simply to help allies such as Russia, but as self-protection in case Washington turns the sanctions weapon against it.
Experts differ over how economically disruptive fragmentation will be. One of the co-authors of the IMF paper, the economic historian Barry Eichengreen, has long argued that the world economy has functioned perfectly well with several reserve currencies in the past. But the dollar’s days of dominance are far from over—particularly when the US can count on the EU’s support, as it can over Ukraine. We are in an era of inter-imperialist rivalries, but some empires are more powerful than others.
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