Is the world heading towards de-dollarization, following the Ukraine war? This is already becoming one of the key questions into the minds of top economists and financial players in the world.
The role of the dollar as the globe’s hegemonic currency gives Washington the chance to artificially increase military budgets, sustain prolonged fiscal and trade deficits, monitor international transactions, implement sanctions, block transactions, freeze foreign assets, strengthen the influence of Wall Street heavyweights in global financial markets, manipulate the prices of strategic commodities, and accumulate stratospheric levels of debt with no meaningful consequences. Moreover, even though it is a fiat currency, the greenback is ultimately backed by US military firepower, including things like aircraft carriers, stealth fighters, nuclear weapons, submarines, ICBMs, special operations forces and drones. Accordingly, those who have challenged the dollar have paid a heavy price. Therefore, the dollar is paradoxically a formidable pillar of US national strength, but also an Achilles heel whose downfall would unravel the unipolarity coveted by the US leviathan in the post-Cold War period.
Shortly afterward, the Russians became one of the leading orchestrators of a worldwide campaign to advance de-dollarization. According to some open sources, the Kremlin covertly assisted Venezuela in the development of a sovereign cryptocurrency backed by oil as a vehicle to diminish the impact of sanctions, likely as a small-scale experiment that, even though it turned out to be unsuccessful, taught a valuable lesson: a much higher critical mass would be needed to challenge the greenback. Moreover, Russia has repeatedly urged the BRICS bloc to launch alternative financial platforms and forge both bilateral and multilateral arrangements to settle payments in non-Western currencies. In hindsight, this original clash over Crimea ‒ despite its smaller proportions ‒ foreshadowed some of the most tectonic developing trends that are being witnessed today. Indeed, the first shots of a very unconventional conflict had already been fired.
As one of the main Western responses to the 2022 Russia’s special operation in Ukraine, the assets of the Russian Central Bank held abroad ‒ in places like the US, the UK, the EU and Switzerland ‒ were frozen. The sum of money that was confiscated is equivalent to nearly half of Russia’s total foreign exchange reserves. Perhaps unsurprisingly, Ukraine is reclaiming the delivery of this cash to Kiev as a compensation with the agenda of “punishing and humiliating” Moscow; but it is unclear if this request will be granted by the West, especially because holding Russian money could be leveraged as an incentive to engage in diplomatic negotiations. In contrast, an outright appropriation or direct transfer would be seen as an unequivocally escalatory move. In order to keep things in perspective, it must be borne in mind that as late as January 2022, Russia had the world’s sixth largest forex reserves.
In this respect, although stealing an enemy’s wealth for its own sake is not uncommon in war, this measure was intended to diminish Moscow’s ability to fund its campaign in Ukraine, bring down the ruble’s value, undermine the ability to implement monetary policy, trigger hyperinflation, provoke a credit crunch, prompt the collapse of the Russian banking system, and stimulate the evaporation of savings. Moreover, it was expected that ‒ along with other Western retaliatory actions ‒ this could lead to regime change in Moscow. Although it is unclear if all the desired outcomes will be achieved, the first effects of this heavy blow materialized in a speedy way. When the Russian “special military operation” was launched on February 24, the exchange rate was 81.31 rubles per dollar and, by March 7, one dollar was worth 142.78 rubles (a 43 percent depreciation in under a couple of weeks). In the words of President Biden himself, the ruble was being reduced to rubble.
Needless to say, this onslaught has tested Russian preparedness and resilience. Russia first reacted defensively with measures of damage control like the introduction of monetary restrictions and the increase of interest rates in order to prevent the utter collapse of the Russian ruble.
Furthermore, in an attempt to bypass Western financial circuits linked with the dollar, Russia is encouraging the growth of alternative financial platforms like the Financial Message Transmission System and the Mir electronic payment system for credit cards. Although both were originally created for domestic purposes, the involvement of foreign trade partners and their interfaced connection with Chinese financial arteries provides a critical lifeline. Likewise, considering that their decentralized governance structure offers counter-hegemonic properties, stateless cryptocurrencies can also offer conduits worth exploring in order to undertake stealth international transactions with partners willing to do business with Russia.
So far, there is no unified European position. Hungary, based on an understanding of statecraft inspired by Machiavellian realpolitik, has expressed its willingness to switch to ruble payments for gas imports if necessary. Other Eastern European nations are sending contradictory signs, which indicates that deliberations are being made in order to assess pros and cons. In turn, non-EU members like Serbia and former Soviet states such as Belarus and Moldova are apparently preparing for an eventual transition towards rubles.
A second Russian accomplishment has been to deter European countries from adopting the hardline approach towards Moscow promoted by the US, the UK, and Poland. Implicitly, this deal demonstrates that Europe has no choice but to rely on Russian energy whether it likes it or not, at least for the time being, and that European nations are reluctant to sacrifice their economic prosperity and to antagonize Russia merely to protect Ukraine, please the Americans, or uphold abstract values. It has also sowed confusion and exposed that the cohesiveness of the EU should not be taken for granted. In addition, the threat to embargo all supplies of Russian fossil fuels ‒ pushed by overzealous neoconservative ideologues‒ has been neutralized. Such an option is not conceivable under the circumstances. It would elicit a strong backlash from Moscow, leading to even higher tensions. Furthermore, since it has the potential to bring a massive economic downturn for Europe as a whole, this reckless measure would be economically and politically suicidal.
Moscow now has the market power needed to shape the euro-ruble bilateral exchange rate in accordance with its interests. The larger significance of this development must not be overlooked. With this counterintuitive masterstroke, the Russian ruble is now tacitly a currency backed by a hard asset with intrinsic value and whose continuous demand is steady in international markets.