The Russia-Ukraine war that broke out on 24 February posed a significant challenge to the US and its allies, being an attempt by Russia to assert its position as a superpower that is capable of influencing the rules of the game.
The US responded by waging a vehement economic war to exacerbate Russia’s isolation by imposing a large set of economic sanctions, building on the economic dominance of Washington over the world.
In return, Moscow seemed ready for Washington’s economic war and even went further, employing some tools that could not only restrict the repercussions of the war, but could carry indications of undermining the US economic dominance. This raises the question about the impact of the moves taken by Moscow in the face of sanctions.
The US Dollar between Dominance and Sanctions
The road the US has taken to become a dominant economic power reflected the tumultuous USD relationship with gold. In 1933, under the administration of President Franklin Roosevelt, the US went off the gold standard in an attempt to revive economic growth. At the end of World War II, the US went back to the gold standard again as part of the Bretton Woods system arrangements. Under the 1994 Bretton Woods Agreement, the US promised to convert dollars brought in by other global central banks into gold at a rate of $35 per ounce.
In blunt terms, the entire Western financial system was pegged to gold via the dollar. The classic gold standard was replaced by the US dollar exchange standard. Countries tended to peg their national currencies to the US dollar at a fixed exchange rate while the dollar itself was pegged to gold. Relatedly, the US’ trading partners were encouraged to settle the trade deficit by hoarding dollar-denominated financial assets such as US government bonds. Despite the growing reliance on the US dollar, some countries have expressed their intention to recover gold, including primarily the announcement of French President Charles de Gaulle’s in 1965 about his intention to exchange its U.S. dollar reserves for gold at the official exchange rate.
Eventually, these pressures led to what became known as the Nixon Shock, after the US President Richard Nixon announced, in 1971, that the US would cease to convert foreign‐held dollars into gold. Nixon announced closing the “gold window” that pegged the US dollar to gold, along with the move towards pricing the dollar according to the rules of supply and demand backed by confidence in the issuing governments and central banks. While this may have seemed as an attempt to abandon the US leadership role, decoupling gold from currencies made the US more central in global finance and reduced restrictions imposed on its financial and monetary policy, as the US Federal Reserve managed to become the most powerful financial institution in the world and Wall Street also became in a much stronger position. Additionally, as most central banks in the world hold a large proportion of their reserves in dollars or US Treasury bills, the dollar has become a major reserve currency worldwide. Global trade continued to be dollar-denominated even after the collapse of the Bretton Woods system. The Petro-Dollar system reinforced the US dominance on global markets.
The idea of petrodollars was introduced in 1973 in the midst of the global oil crisis that was associated with the October War. Petrodollars refer to crude oil dollar-denominated export revenues resulting from the large surpluses of the oil-exporting countries. Henry Kissinger, then Secretary of State, worked on promoting this idea, and Saudi Arabia, being the top oil producer, decided to use the US dollar as the only pricing currency for oil exports, which gave rise to an unanimous agreement among members of the Organization of Petroleum Exporting Countries in 1975 on the pricing of petroleum products in US dollars and oil revenues were invested in US government bonds.
As such, the US economic supremacy, established for nearly a century, allowed the US to launch a major economic war against Russia due to its military escalation against Ukraine. Meaning, it was able to punish Russia and tighten the noose on it through a set of economic sanctions that isolate it from the world, including banning all new investments in Russia, tightening sanctions on financial institutions and Russian state-owned companies, and sanctioning Russian government officials and members of their families.
Washington imposed sanctions on the Central Bank of Russia (CBR) to freeze foreign currency owned by Russia in US banks, which Russia also used to pay off its debts. In simple terms, Washington imposed sanctions on the banking sector in Russia, e.g. freezing the assets of foreign Russian banks, including those of the Central Bank, restricting Russian banks access to dollars and euros, banning Russian banks from trading US and European bonds, and suspending membership of the CBR’s in the Bank for International Settlements. The value of the frozen reserves owned by the CBR amounted to more than $300 billion, i.e. half of the total Russian reserves. Moreover, the US announced a ban on exporting Russian energy, and formed, in collaboration with the European Union on 25 March 2022, a “working group” with the aim of reducing Europe’s dependence on Russian fossil fuels.
The US Dollar and Counter-Russian Moves
In the wake of the outbreak of the Russo-Ukrainian war, Washington imposed the largest series of sanctions on Moscow, which was reflected in a rapid devaluation of the Russian ruble, which some analyzes considered a defeat for Russian President Vladimir Putin and a victory for Washington and its allies. However, this scene, has undergone a transformation since April when Moscow managed to take steps to stop the economic collapse by countering the rapid fall of the ruble, in what was considered not only a resistance to the economic strangulation waged by the US but as a move to undermine the US dominance. In this vein, this can be broken down into two main points:
Damaging the Allure of the Dollar
The market value of the Russian ruble has risen remarkably at the onset of transactions on 7 April following the decision of pegging the ruble to gold, at a fixed price of ₽5,000 a gram. This decision enabled Russia to reduce the value of the dollar by about 30 percent against the value of Gold bullion bars, simultaneously with Russia’s direction to sell the natural gas in rubles. Meaning any state that is wishing to import Russian gas has to pay for it in the rubles or the gold at the value set by Russia. In other words, pegging the ruble to gold will push countries to purchase the ruble from Putin in exchange for gold or directly paying for gas in gold.
Seemingly, Russia had previously prepared for such a scenario, as has been evidenced by holding more reserves in gold than the dollar in June 2020, with gold bars accounting for more than 23 percent of total reserves. Moscow is now seeking to evade the sanctions by trading on China’s Shanghai Gold Exchange. Parallelly, in an attempt to encourage Russian savers to abandon the dollar, President Putin signed a law that exempts individuals from value-added tax on gold purchases. On the other hand, Moscow pointed out that Russia’s friendly countries can pay for oil and gas in other currencies such as the Bitcoin and other local currencies such as the Chinese yuan or the Turkish lira.
From the foregoing, it is clear that Washington’s use of the dollar as a weapon in general and during the Russo-Ukrainian war in particular, doesn’t only harm the economies of the targeted countries but also the economies of other countries and their peoples. As a result, Washington’s capitalization on its currency as a weapon will give rise to a crisis of confidence in the dollar and will eventually cause other countries to diversify their reserves and work to develop payment mechanisms, which would undermine the priority of the dollar in the long run. Moscow set an example in this regard, through pegging its currency to gold, increasing its gold reserves, and using gold and local and digital currencies in intra-regional trade, which may prompt other countries to follow the example of Moscow so as to experience a safer financial and economic position. Meaning, after period of time, the dollar may decline while other currency reserves of local and digital currencies may rise.
The Petrodollar Challenge
While most Russian energy exported to Europe is dependent on the euro rather than the US dollar, Russia’s tendency to sell Russian oil and gas in rubles or other local currencies will undoubtedly pose a challenge to the petrodollar. Russia has asked what it calls “non-friendly” countries to transfer natural gas payments in rubles instead of dollars or euros. Further, Bloomberg indicated that Russia has started receiving payments for the oil in the Chinese yuan. Several media reports have also indicated that Saudi Arabia is considering pricing some of its oil sales to China in yuan and integrating futures denominated in Chinese yuan into the Saudi Aramco pricing system. As such, Russia’s use of the Chinese yuan instead of the dollar in the oil trade with China will have a great impact on the global commodity trade market. Additionally, India’s central bank has also cooperated with the CBR to establish a rupee-ruble trade payment mechanism which will allow them to continue their business with Russia.
So, while Saudi Arabia’s moves regarding the yuan are still uncertain, the challenges that the “petrodollar” system has faced for some time due to some countries’ getting around the sanctions imposed on them, the linkage of the “petrodollar” with that are security and political arrangements currently under review, and fossil fuels’ losing their hegemony given the adoption of carbon reduction policies globally, have been made more complex with Russia’s attempts to refute the US dominance. For instance, Japan, the largest importer of Russian natural gas, has stated that it is considering the details of the ruble payment. Moreover, South Korea, the third largest importer of Russian gas in Asia, confirmed that it would do anything to avoid interruption of Russian gas exports, meaning this trend wasn’t restricted to the countries hostile to the US’ dominance, such as China but extended to include Washington-allied countries as well.
The Edge of Influence
Despite Moscow’s steps to counter the Western sanctions, driven by the desire to confront the US supremacy and despite their discrete implications, affecting the US supremacy in one way or another, the large-scale impact capable of flipping the scene around has not yet been achieved. According to the data on the US Federal Reserve website, the USD is the currency most used in global trade. Over the period from 1999 to 2019, the USD accounted for 96, 74, and 79 percent of trade in the Americas, the Asia-Pacific region, and the rest of the world (except Europe where the euro is dominant) respectively. The USD is also the dominant currency in international banking, with about 60 percent of international and foreign currency liabilities (deposits) and claims (mainly loans) denominated in dollars.
As for the Federal Reserve Dollar Indexes, the dollar index level has remained stable at a value of about 75 since the Global Financial Crisis in 2008, well ahead of all other currencies. The euro had the next-highest value at about 25. While international usage of the Chinese yuan has increased over the past 20 years, it has only reached an index level of about 3, remaining even behind the Japanese yen and British pound, which are at about 8 and 7, respectively. As such, the US enjoys enormous influence within international economic organizations such as the World Bank, the International Monetary Fund, and the World Trade Organization, which enables it to establish rules of the game in the international economic arena. All these indicators make it clear that weakening the dollar is not expected to happen in the short or medium term, but perhaps in the long term, given several signs that go beyond Russia’s anti-sanctions moves to include several developments, most notably strengthening European integration in a way that could make the euro more attractive and resilient than the dollar, China’s continued growth in a way that would cause the Chinese GDP to overtake the US GDP, supporting the Chinese currency, expanding the use of digital currencies whether in the formal or informal sectors, and expanding in the building regional blocs with their own payment system that goes beyond relying on the dollar.
In the midst of the ongoing Russo-Ukrainian war, the US adopted a series of actions that would help support the dollar locally and globally. The Federal Reserve announced that it would raise the benchmark interest rate a quarter percentage point for the first time since 2018, with projections that interest rates will rise to a range between 1.75 and 2 percent by the end of 2022. Further, the US has tended to engage in the commodity markets, particularly the markets of goods that were provided by both Russia and Ukraine before the war, such as wheat and corn. US Secretary of Agriculture, Tom Vilsack, stated, during his trip to the UAE on 19 February, that the “US wheat farmers will boost production and prevent any supply chain problems if a possible Russian invasion of Ukraine stifles agricultural exports of grain. Restrictions on Russian oil and gas seem to offer an opportunity to support the US energy sector on the international arena. Early this year, the US managed to become the largest exporter of liquefied natural gas in the world, following the rise in gas export levels to Europe.
When it comes to Russia’s move to peg the ruble to gold, Washington is seemingly making efforts to counter Russian moves aimed at challenging the USD supremacy. Members of the US Senate introduced legislation aimed at freezing Russia’s gold reserves, in a move that will make it difficult for Moscow to stop the economic bleeding it is suffering due to the sanctions. In the same vein, the London Bullion Market Association (LBMA) suspended the membership of six Russian precious metals refineries. The Chicago’s CME Group did the same and suspended the same six Russian refineries. Neither LBMA nor CME Group has specified when this suspension will be put to an end, which means it will likely be in place until further notice. The step has a significant impact many banks only accept precious metals that meet the strict standards of the LBMA.as
In sum, the US is making the most of its global economic supremacy through the punitive instruments it uses against its opponents, which was evident in the large set of economic sanctions it imposed on Russia following its military escalation against Ukraine. Russia, in return, adopted counter measures to minimize the impact of these sanctions, in a way that helped it avoid the rapid deterioration of its economic power. Overall, Russia’s moves seem to have brought gains for Moscow, but they did not necessarily pose a threat to the US and its economic supremacy, nor did they put an end to the dominance of the dollar in the international sphere.