Global de-dollarization has been active for years as countries like China, Russia, Iran and others find ways to insulate themselves from US sanctions. This shift towards other assets and currencies for global trade will shape a new world order in the decades to come. Full time MBA student and CFA candidate, Yelian Garcia, analyzes the decline of the dollar, and how other countries are fighting back against dollar hegemony.
The United States is waging economic warfare against one tenth of the world’s countries, who have a cumulative population of nearly 2 billion people and a GDP of more than $15 trillion; these countries include Russia, Iran, Zimbabwe, Cuba, Sudan, Congo, Venezuela, Myanmar, and more. The reasons for enacting sanctions on these countries is, from a U.S. perspective, extremely diverse. From human rights violations to nuclear trade and unfair trade practices, it seems like the United States has a diminishing list of allies. From Russia to the EU, as well as China, South Korea, Japan and Turkey, everyone is facing the unprecedented decision to apply tariffs on trade. In Trump’s mind, this is the only way to balance a trade deficit that has now reached more than 500 billion dollars.
America’s global supremacy has been made possible by its control over global finance and the acceptance of the dollar as the world’s reserve currency; the status of which has anchored the global financial system since World War II. Yelian Garcia explains that any transaction done in US dollars, or using a US bank, automatically brings the trading parties under American legal jurisdiction. This power is useful leverage for the United States, as not many companies or banks can afford to give up on the U.S. market or be denied access to their financial institutions. In response to this hegemonic hold on the monetary system, both China and Russia are taking measures to reduce their reliance on the greenback and are urging trading partners to ditch the dollar in their bilateral trade in favour of indigenous currencies.
The Effects of De-dollarization
De-dollarization has been enacted for dozens of reasons and has had some interesting effects. For example, Vladimir Putin supports removing the dollar as he back a tentative de-dollarization plan to protect his country from future US sanctions. Putin explained that Russia cannot support the US dollar-denominated finance system due to violating WTO rules and imposing unilateral sanctions. Additionally, he explained that a dollar monopoly is unsafe and dangerous for the global economy. Once Russia clears its books of US dollarized debt, what country will be next to diversify their US debt exposure risk?
All that being said, the overall positive state of the US economy and the remarkable strength of the dollar still make it the most highly traded and valued currencies globally. However, given the global push towards ending dollar hegemony, thwarting their efforts should be Washington’s top national priority.