US Dollar’s Dominance Could Be Threatened By West’s Russia Sanctions, Warns The IMF
The dominance of the US dollar could be gradually diluted because of the tough financial sanctions imposed on Russia over its invasion of Ukraine, said IMF’s First Deputy Managing Director, Gita Gopinath, in an interview with the Financial Times.
Gopinath said that the current Ukraine crisis-related sanctions on Russia could also create a more divided international monetary system.
A wide range of sanctions on Russia has been imposed by Western countries, including the United States, over its military action in Ukraine which started on February 24. Russia however has termed its invasion of Ukraine as a ‘special operation’ and aims to disarm its neighbor and force Ukraine to adopt a neutral foreign policy.
“The dollar would remain the major global currency even in that landscape but fragmentation at a smaller level is certainly quite possible,” Gopinath said in the interview to the newspaper. There are a few countries that are already renegotiating the currency that they would use for receiving payments for exports and for paying for imports.
The trend of adoption of digital finance, from cryptocurrencies to stablecoins and central bank digital currencies, would also get accelerated by Russia’s Ukraine war, Gopinath said.
There was however no official statement on these issues from the IMF.
There would be greater diversification of the reserve assets that are held by central banks of various countries because of the greater use of other currencies in global trade, Gopinath told the newspaper.
“Countries tend to accumulate reserves in the currencies with which they trade with the rest of the world, and in which they borrow from the rest of the world, so you might see some slow-moving trends towards other currencies playing a bigger role [in reserve assets],” Gopinath said.
In earlier comments, Gopinath had said that the sanctions imposed against Russia do not clearly indicate that the US dollar would face demise as the reserve currency and that Russia’s war in Ukraine will cause a slowdown of global economic growth but will not be enough to trigger a recession.
For years, Russia has been trying to reduce its dependence on the US dollar, efforts for which were accelerated after the imposition of US sanctions in 2014 over Russia’s annexation of Crimea.
However, at the beginning of the Ukraine war, Russia held in US dollar-dominated assets about a fifth of its foreign reserves, and a large part of those assets were held overseas in Germany, France, the UK, and Japan. All those nations have come together and imposed sanctions to isolate Russia from the global financial system.
Over the past two decades, the share of the dollar in international reserves has dropped to about 60% from 70% as there has been the emergence of other trading currencies, led by the Australian dollar, Gopinath noted.
The greater use of the Chinese renminbi was potentially responsible for the decline of about a quarter of the dollar’s share in globally held assets. But according to IMF data, less than 3% of the reserve assets held by global central banks are denominated in the Chinese currency.