The West’s actions against Russia since the war in Ukraine could signal the emergence of a new order that avoids the United States for militarizing the dollar and Western control over the global financial system.
by Prabir Purkayastha
Does the war in Ukraine and the action of the United States, the EU and the United Kingdom mean the end of the dollar as the world’s reserve currency? Even with the recent peace talks in Turkey or the proposed 15-point peace plan, as the Financial Times reported earlier, the fallout for the dollar remains. For the first time, Russia, a major nuclear power and economy, was treated as a vassal state, with the US, EU and UK seizing its $300 billion foreign exchange reserves. What about other countries, which also hold their foreign exchange reserves largely in dollars or euros?
The threat to dollar hegemony is only part of the fallout. Complex supply chains, built on the premise of a stable trade regime in line with the principles of the World Trade Organization, also threaten to collapse. The United States discovers that Russia is not just an oil state as they thought, but also provides many essential materials that the United States needs for several industries as well as for its military. This ignores the fact that Russia is also a major supplier of wheat and fertilizer.
Seizing funds from Russia means trust in the United States as the world’s banker and in the dollar as the world’s reserve currency is in question. Why should countries maintain a trade surplus and bank it abroad if that surplus can be seized at will by Western-imposed sanctions? The promise of a dollar as the world’s reserve currency was that all dollar surpluses were safe. With the seizure of the $9.5 billion from the Afghan central bank and the allocation of $7 billion from it, the United States has shown that it considers another country’s dollar reserves, held by the central bank of the United States, as its currency. It can be an economic asset on the books for a country to maintain its foreign exchange reserves with the US central bank. But this is actually a political liability, as the US government can take this asset as it sees fit. The United States has already shown its ability to impose sanctions on countries such as Iraq, Libya and Venezuela and to seize their assets, which has had considerable negative effects on these countries. The seizure of Russia’s foreign exchange reserves by a handful of Western countries – former colonial and colonial states – shows that the so-called rules-based order now rests on the militarization of the dollar and Western control over the global financial system.
Economists – Prabhat Patnaik and Michael Hudson – and financial experts such as Zoltan Pozsar of Credit Suisse are now predicting a new regime in which another currency or variant of the system will emerge as the new global reserve currency. According to Pozsar, “when this crisis (and this war) is over, the US dollar should be much weaker and, conversely, the renminbi much stronger, backed by a basket of commodities.”
What led to these predictions? After World War II, the Bretton Woods agreements made the dollar the world’s reserve currency. It replaced the pound sterling and was pegged to gold at a conversion value of $35 for an ounce of gold. In 1971, then-President Richard Nixon ended the Bretton Woods system and abolished the “convertibility of the US dollar to gold”, which meant that the dollar was now backed only by the guarantees of the US government (or US Treasury). The dollar as a reserve currency had three advantages in the postwar years: it was backed by the United States, which was the largest industrial producer in the world; the United States was the predominant military power even though challenged by the Soviet Union; and it was backed by West Asian oil, the most traded commodity, priced in dollars.
The naming of oil from West Asia, particularly Saudi Arabia, was critical to the United States and was determined by its military power. The coup in Iran against Prime Minister Mohammad Mosaddegh in 1953, the 1958 coup in Iraq and many other political events in West Asia can be understood more easily if the world understands the importance of oil for the United States. This was the basis of the Carter Doctrine, extending the equivalent of the Monroe Doctrine to the Persian Gulf region – and reflected the United States’ interest in the region and its lack of tolerance for interference from any outside power the low. US foreign policy in West Asia has been captured on bumper stickers and anti-war protest signs for decades with variations of the phrase “Our oil is under their sand.” The United States’ control over West Asian oil, combined with its industrial and military might, has allowed the dollar to remain the world’s reserve currency.
The fall of the United States as a global industrial power has gone hand in hand with the rise of China. A measure of China’s industrial rise can be seen from a simple comparison provided by the Lowy Institute using International Monetary Fund global trade data. In 2001, more than 80% of countries had the United States as their main trading partner compared to China. By 2018, that figure had fallen to just over 30%, or 128 out of 190 countries.”[traded] more with China than with the United States. This radical change has occurred in less than 20 years. The reason for this change is industrial production: China overtook the United States in 2010 to become the world’s largest industrial producer. (India is the fifth largest industrial producer but manufactures only 3.1% of global production compared to 28.7% of manufacturing produced by China and 16.8% by the United States for industrial production world.) It is not surprising that the world trade pattern follows industrial production.
Two recent events are important in this context. China and the Eurasian Economic Union made up of Russia, Kazakhstan, Kyrgyzstan, Belarus and Armenia appear to be moving towards a new international and monetary system. India and Russia also appear to be working out a rupee-ruble swap based on India’s need to import Russian weapons, fertilizers and oil. India had already created a similar system earlier to buy Iranian oil in rupees. It could also give a boost to India’s increased exports to Russia. Saudi Arabia recently indicated that it may also designate its oil sales to China in yuan rather than dollars. If that happens, it would be the first time since 1974 that Saudi Arabia has sold oil in a currency other than the dollar. This would give the yuan an immediate boost, since more than 25% of all Saudi oil is sold to China.
The United States dominates the services, intellectual property (IP) and information technology (IT) markets. But markets for physical goods, unlike services such as intellectual property and IT, rely on a complex pattern of supply and, therefore, have complex global supply chains. If Western economic warfare means pulling Russian supplies out of the global market, many supply chains risk collapsing. I have written before about the energy war and how the European Union is dependent on gas flowing from Russia to Europe. But many other commodities are essential for those who sanction Russia and those who may now find it difficult to trade with Russia due to Western sanctions.
Curiously, one of the key parts of the chip manufacturing supply chain depends on Russia. Russia is a major supplier of sapphire substrates (using artificial sapphires) which go into the manufacture of semiconductor chips. The other essential for chipmakers is neon, whose two main suppliers are located in the southern Ukrainian cities of Mariupol and Odessa. Together, they produce “between 45% and 54%” of the world’s neon supply.
I have already pointed out earlier the danger posed to the EU’s climate change plans following the conflict between Ukraine and Russia, which could also jeopardize its plan to switch to gas as a transition fuel. The use of batteries as a key storage element in the path to renewable energy also presents a significant weakness for Russia. Nickel is essential for electric batteries and Russia is the third nickel supplier in the world. Together with the sanctions imposed by the United States and the EU on Russia, this could lead to China, which is already emerging as the largest supplier of batteries in the world, to achieve an even more dominant position in the global battery market.
Other supply chain issues that could arise as a result of the Russian-Ukrainian war relate to palladium, platinum, titanium and rare earths. All of these minerals are needed by cutting-edge industries and are at risk of being caught in supply chain bottlenecks around the world. They are also on the list of 50 strategic minerals that the United States needs because they are essential to its security. A look back at how global supply chains seized up during COVID-19 should give the world an idea of what the crisis to come could look like and why it could be much worse than what has been seen during the pandemic. Sanctions are easy to impose, much harder to lift. And even after the sanctions are lifted, the supply chain will not work as it used to. Remember that these global supply chains have been gradually configured over decades. Defeating them using the Sanctions Wrecking Ball is easy; redoing them is much more difficult.
Food supplies around the world will be hit even harder. Russia, Ukraine and Belarus produce a significant amount of fertilizer needed by farmers around the world. Russia and Ukraine are among the biggest wheat exporters. If Russian wheat is sanctioned and Ukraine’s crop is hit by war, the world will struggle to stave off a severe food shortage.
There is no doubt that the world is on the cusp of major economic change. This turn will either lead to the complete destruction of the Russian economy, even if Russia achieves a quick peace with Ukraine and there is no NATO-Russia war. Or it will reconfigure a new economic order that was in sight: a world order with cooperative solutions instead of military and economic wars for resolution.
This article was produced in partnership by Newsclick and Globetrotter.
Prabir Purkayastha is the founding publisher of Newsclick.in, a digital media platform. He is an activist for science and the free software movement.
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