Mar 3, 2022 - Economy

The dollar remains the West's ace in the hole

Illustration: Aïda Amer/Axios

The sanctions that are now hammering Russia's currency, banks and economy are a vivid demonstration of the power of the U.S. dollar.

Why it matters: It provides a rare glimpse of the often invisible — but incredibly valuable — influence the greenback gives the U.S.

  • Starting Feb. 24, the U.S., the E.U. and other allies imposed a range of particularly severe sanctions — from barring several Russian banks from using Swift, to freezing the assets of the Russian central bank.

State of play: The ruble has dropped 30% in the last 10 days, hitting a new record low. Russians are lining up to withdraw cash from ATMs .

How it works: The sanctions only pack this kind of punch because they cut off Russia's unfettered access to the U.S. dollar, which a modern economy needs to function.

  • Half of all international trade is done in dollars, and half of all global bonds and loans have to be paid back in dollars. About 90% of all currency trades involve the dollar.

Russia relies on its central bank as well as its commercial banks to source the dollars it needs — which is why the U.S. and its allies have sanctioned large chunks of the financial system, and the central bank itself, to make finding those dollars difficult.

Yes, but: Some say cutting off Russia's access to dollars — or weaponizing the currency — could push U.S. adversaries like China and Russia to create a parallel system that avoids using the buck.

  • In theory, such a system would insulate these countries from precisely the kind of pressure the West is putting on Russia.
  • In other words, the recent demonstration of the dollar's strength might actually mark the start of its decline.

What they're saying: "Never seen weaponization of money on this scale before…you only get to play the card once," Dylan Grice, a hedge fund manager based in the U.K., tweeted. "It’s a turning point in monetary history: the end of USD hegemony."

  • Such ideas are having a moment. Bloomberg and the Financial Times both recently riffed on the era of dollar dominance, and how it could be shortened by recent sanctions.

But don't bet on that any time soon, says Abraham Newman, a Georgetown University political science professor who has studied how global financial systems can become a source of power.

  • He says the dollar system isn't a top down invention of world leaders. Rather, it organically developed over decades in which private investors, traders and businesses decided that they preferred to use greenbacks.
  • That's because the dollar is a relatively stable, easily traded currency in a country with an accountable government and transparent legal system.

On the flip side: China's currency, the yuan — most widely seen as a potential rival to the dollar — has few of those advantages, largely because of the Chinese government's authoritarian nature.

  • For instance, in order to keep control over the flow of money in and out of the economy, the yuan remains "non-convertible," meaning it can't be easily exchanged for other currencies.
  • On top of that, China's financial system remains very much an arm of the Chinese government — and people considering where to keep their money know that, Newman says.

The bottom line: There's a long history of people looking for alternatives to the dollar. It still doesn't exist. That's a major source of strength for the U.S.

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