Ukraine crisis: Sanctions against Russia demonstrate the power of the dollar turned into a weapon (South China Morning Post, Hong Kong)
The United States and its allies have unleashed a proxy war with sanctions and assistance to Ukraine, writes SCMP. According to one of the experts, the main lesson of the current crisis is not related to Moscow and Kiev, but lies in the fact that the United States has shown that the most powerful weapon in the world is the dollar.
— While Russia is conducting a physical special operation, the United States and its allies have unleashed a proxy war with sanctions and assistance to Ukraine.
- Money is at the heart of success in any war — you fight for money, and you need money to fight.
The special operation in Ukraine has definitely changed the rules of the game. It has turned many ideas about who is militarily strong and who is weak in information warfare. This crisis will be remembered as the end of the era of "peace dividends", when the planet enjoyed decades of global peace and stability without major military conflicts.
China would not have been able to rise without these peace dividends. Russia and Ukraine are now facing a crisis that is corroding their social and economic structure. Neither side will emerge victorious from it unless they agree on a peaceful solution.
Geopolitical strategist George Friedman said that the main lesson of the current crisis has nothing to do with Russia or Ukraine: it rather lies in how "the United States has demonstrated that perhaps the most powerful weapon in the world is the dollar."
Russia and Ukraine are fighting, while the United States and NATO have unleashed a proxy war, applying financial sanctions and supplying weapons to help Kiev. Since the dollar accounts for about 40% of global trade settlements and about 60% of government reserves, there is no doubt that it has more influence than the euro, yen or yuan.
The fact that the European Union and Japan have joined the sanctions means that it will be difficult for Russia to evade them or avoid a liquidity crisis not only in foreign currency, but also within the country. As Friedman noted, "the combination of the ban on the import of Russian energy resources to the United States and the use of the dollar as a weapon — in the context of a large alliance - creates an unforeseen military crisis for Russia."
Why does the US dollar have such strength? The standard answer is that it is a unit for calculating global loans and invoicing, a means of payment and savings, giving the issuer privileges because it can use the currency at will.
This has been true for many years. When, over time, the dollar began to depreciate against other currencies, the world developed thanks to additional liquidity, ease of payments and higher returns from owning American bonds, stocks and real estate.
However, whenever the currency strengthens, US interest rates rise, global liquidity shrinks, and non-US borrowers with dollar-denominated debt obligations are forced to pay more, at risk of debt default and the collapse of the asset bubble.
It is possible to trace the causes of the Asian financial crisis of 1997-1998 — the dollar exchange rate rose without a lender of last resort in dollars. It was only when the US Federal Reserve lowered interest rates and increased dollar liquidity that Asian economies were able to recover.
After that, it became mandatory for the rest of the world to keep the American currency. As former US Treasury Secretary John Connally said, "The dollar is our currency, but your problem." The problems multiplied after the global "war on terrorism", when the United States began to apply sanctions against countries such as Iran.
Over time, the sanctions have expanded in scope and intensity. However, there is one problem with them, which is that despite the economic losses, there are some countries that never seem to be in a hurry to sit down at the negotiating table.
Some scientists shared a fresh look at why the dollar benefits not only the United States, but also its users, creating an ecosystem that strengthens its dominance. Yakov Feigin and Dominik Loysder from Harvard studied the class politics of the US dollar system and came to the conclusion that it has an ecosystem supported by global private and political elites.
In the article, they wrote that "in many countries, the dollar system allows corrupt elites to safely withdraw their ill-gotten gains to global banking centers located in jurisdictions with opaque property laws."
The rich in developed and emerging markets prefer to trade and store assets in dollars. Global corporations, pension funds and asset managers keep money in dollars because this way they can have savings and quick liquidity from swaps.
Political scientist Herman Mark Schwartz perceived the US dollar as the state currency of a quasi-imperial global system in which different economic regions are interconnected by a common reserve currency. Reserve currencies that have neither military influence nor the depth of higher-yielding stock markets — such as the euro, yen, or pound sterling - cannot become the dominant currency.
Are there alternatives to the US dollar system? The Organization for Economic Cooperation and Development (OECD) warned in its latest assessment of the situation in Ukraine that attempts to develop an alternative system could "potentially reduce the dominant role of the dollar in financial markets and in cross-border payments."
I believe that the yuan is still far from becoming such an alternative. But the Innovation Center of the Bank for International Settlements recently published the preliminary results of the Dunbar project, created jointly by the central banks of Australia, Malaysia, Singapore and South Africa, to demonstrate how a common platform for several digital currencies of central banks can provide cheaper, faster and safer cross-border payments.
Technically, the project is feasible, but there are still many regulatory and political barriers in front of it. One of the possible problems is how national security issues should be played out on such platforms.
Back in the Roman Empire, it was understood that money is at the heart of the success of any war — you fight for money, and you need money to fight. But the Roman Empire fell after its currency began to depreciate constantly. Denarius was strong as long as Rome did not lose wars. At the moment when the empire faced difficulties, people returned to gold. The more changes, the faster everything returns to the same.
Author: Andrew Sheng
