Mar 3, 2022 - Economy

Dollar reigns supreme after Russia's invasion

A map peeled back to reveal Ben Franklin's eyes from the dollar bill

Illustration: Sarah Grillo/Axios

Money is memory, as the economist Narayana Kocherlakota once wrote. Ultimately, the dollars in a person's wallet, or checking account, are a record of having produced something of value to someone else, an entry in a cosmic ledger.

Driving the news: But memories can be forgotten. The Russian government and countless Russian companies and individuals are learning that the hard way.

Why it matters: Within the space of just a few days, the U.S. and its allies accomplished the astonishing feat of cutting Russia out of the global financial system. In the process they may have further entrenched the centrality of the U.S. dollar to the global economy.

The big picture: The Russian government had built up $630 billion in reserves to protect its economy against capital outflows. It now looks largely useless after the U.S. and allies cut off the Russian central bank's access to West.

  • In a way, it's a startling reminder of the sheer power that nation-states have over the use of currency. In just a few days, they turned the world's 11th largest economy into the equivalent of a drug kingpin sitting on a big pile of un-laundered cash they can't spend.

Traditionally, there has been a tradeoff when the U.S. takes advantage of the dollar's primacy in the world economy to implement its foreign policy goals. The more that power is used, the more you risk losing it.

  • So when the U.S. has enforced sanctions on Iran, North Korea and other countries by threatening those who violate them with cutting off access to the dollar-based financial system, it increases the urgency of China and other nations to create international financial alternatives.

In its scale and speed, the retaliation against Russia dwarfs any previous use of the global banking system to cut a nation out and render its assets unusable. So an important question is whether it commensurately puts the whole thing at risk.

Yes, but: This is not a situation in which the U.S. is acting alone. Rather, it is represents a rare moment of global unity, in which the vast majority of nations are appalled by Russia's actions, as evidenced the U.N. General Assembly vote to condemn the invasion: 141 to 5 with 35 abstentions.

  • In that sense, it amounts to a moment when the value of the dollar-based global financial system is in clearer view — it creates a mechanism for the world to come together and call out a bad actor.
  • As Bloomberg's Matt Levine puts it, "If you do something so outrageous that society as a whole decides you are a pariah, then money is a way for society to express that."

The bottom line: Yes, there is always risk that using the tools of financial warfare will make them less useful in the future. But Russia's invasion is also showing the world just how costly it is to become a pariah state.

Go deeper: The dollar remains the West's ace in the hole

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