Financial sanctions on Russia could reduce US dollar dominance: IMF official

IMF First Deputy Managing Director Gita Gopinath said Western restrictions and sanctions imposed on Russia to deprive the country of the global financial market and foreign currency reserves could wither the current global monetary system. Gopinath said in an interview that the sanctions imposed on Russia following its invasion of Ukraine could gradually weaken the dominance of the US dollar. Explaining the current scenario, Gopinath pointed to the decline in the dollar’s share of international reserves from 70% to 60% over the past 20 years with the emergence of other trading currencies.
She explained the following implications following the numerous sanctions imposed on Russia:
*Restrictions, especially on the Central Bank of Russia, could lead to the emergence of small currency blocs based on trade between groups of nations.
* She however proposed that the dollar continue to remain the main world currency although the fragmentation of the currency is still possible at this level.
– She highlighted Russia’s de-dollarization campaign since the United States imposed sanctions following the annexation of Crimea in 2014. She is trying to reduce her dependence on the US dollar.
* Gopinath explained that the decline in the dollar’s share of global reserves is attributed first to the Australian dollar, followed by the Chinese renminbi, which accounts for a quarter of the decline in the dollar’s share.
* The IMF official, however, asserted that the renminbi would not be able to replace the dollar as the dominant reserve currency because the dollar has full currency convertibility and is backed by open capital markets and strong institutions .
* The IMF official explained that the increased use of other currencies in global trade would lead to greater diversification of reserve assets held by national central banks.
* Finally, the ongoing war would also lead to faster adoption of digital finance, including cryptocurrencies, stablecoins, and central bank digital currencies that would require greater regulation.
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