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An end to the dollar's global hegemony? The Kremlin sees an opportunity.

Why We Wrote This

The dollar has long been the world's reserve currency. But some countries, angered by sanctions, are  challenging that status, potentially undermining one of the US's most influential tools for shaping global policy.

Pavel Golovkin/AP
An exchange-office screen on a Moscow street shows the currency exchange rate of the Russian ruble and US dollar in April. The Kremlin has begun making moves to insulate the Russian economy from escalating US sanctions.

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The idea might have sounded quixotic a decade or so ago, when Russia and China first started talking about it. But the Kremlin is seizing what it sees as an opportunity to force the dollar out of its privileged position in global trade and finance. The Trump administration has been using the dollar – which holds a hegemonic position – to punish any entity or country that attempts to defy proliferating unilateral US sanctions against Russia, Iran, and China. But this has chafed globally; even the European Union is creating a financial institution beyond the dollar's reach in order to maintain trade with Iran. The Kremlin hopes that this means there is finally momentum to move away from the dollar. “More and more countries, not only in the East but also in Europe, are beginning to think about how to minimize dependence on the US dollar,” Kremlin spokesman Dmitry Peskov told journalists last week. “And they suddenly realize that (a) it is possible, (b) it needs to be done, and (c) you can save yourself if you do it sooner.”

For average Russians, a small personal hoard of US dollars has always represented a place of safety amid the wild ups-and-downs that continue to beset the country's national currency, the ruble.

So it triggered a touch of panic among them when the Russian government confirmed long-standing rumors that it is working on a plan to insulate the economy from escalating US sanctions through “de-dollarization.”

The Trump administration has increasingly worked to weaponize the US dollar, by using its hegemonic position as the world's “reserve currency” to punish any entity or country that attempts to defy proliferating unilateral US sanctions against Russia, Iran, and China. And the Kremlin is seizing what it sees as an opportunity to force the dollar out of its privileged position in global trade and finance.

The idea might have sounded quixotic a decade or so ago, when Russia and China first started talking about it. For advocates, it has a rousing rhetorical ring to it, but experts say it's an extremely difficult reality to change in practice. Even Russia and China, the world's leading anti-dollar activists, have so far only managed to shift about a quarter of their own $60 billion bilateral trade into other currencies.

But now the European Union has announced that it will create a special financial infrastructure to continue trading with Iran, despite the threat of “secondary sanctions” from Washington. It will have to be built from scratch, to effectively avoid any use of the US dollar or the global banks and financial circuits that fall under US regulation. The EU, whose own currency, the euro, is a potential contender to take the dollar's place, has indicated that other signatories of the Iran nuclear deal, such as Russia and China, might have access to their new payment system for “legitimate” trade with Iran.

In the changing environment other countries, even India, which purchases weapons from sanctioned Russian companies, may find themselves looking for ways to circumvent the dollar and the US scrutiny that comes with it.

“Of course this plays into Putin's hands, because anything that makes the US look like the enemy, with other countries supporting us, bolsters his public image,” says Andrei Movchan, economic policy expert with the Carnegie Center in Moscow. “But this is being driven by the threat that new sanctions, being prepared in Washington, would prohibit Russian banks from dealing in US dollars.”

“In fact, this whole discourse about sanctions and how to evade them is becoming permanent. And, in principle, switching to the use of other currencies is feasible; it wouldn't be easy, and would impose a lot of new costs, but it can be done.”

The dollar's deep reach

There are short-term risks for the Kremlin in moving against the dollar. The Moscow daily Moskovsky Komsomolets reported this week that nearly $20 billion has been withdrawn from Russia in the past three months, almost 50 times the outflow for the same period last year, in part due to the growing official talk about banning the dollar.

But Russian officials have rushed to reassure average citizens that their hard-won right to hold bank accounts denoted in foreign currency is not under threat. Instead, they have cast the issue in geopolitical terms, warning that the multiplication of US sanctions against Russia is reaching a point where Washington itself might ban Russian banks from any transactions in dollars. Thus, they say, the country needs to ready its financial system to meet that challenge.

“More and more countries, not only in the East but also in Europe, are beginning to think about how to minimize dependence on the US dollar,” Kremlin spokesman Dmitry Peskov told journalists last week. “And they suddenly realize that: a) it is possible, b) it needs to be done, and c) you can save yourself if you do it sooner.”

Since the end of World War II, the US dollar has been the world's de facto reserve currency. Most goods traded internationally are priced in dollars, as is 40 percent of global debt and 64 percent of all governments' foreign currency reserves.

Besides spreading a net of subtle American financial control over much of the world, this has benefited the US in a variety of other ways. The widespread demand for dollars in international trade, particularly oil and gas, keeps the dollar strong and US interest rates low, and contributes to its reputation as a “safe haven” currency. Even during the financial collapse of 2008, people the world over rushed to buy dollars, and dollar-denominated assets such as US treasury bills, in order to keep their money safe.

That, in turn, enables the US government to run very high budget deficits which, despite frequent cries of alarm from conservative commentators, has yet to create anything like the debt crises that often sink lesser economies, such as Greece.

Speaking to an international economic forum in Vladivostok last month, Vladimir Putin warned that US debt is a time bomb that threatens global stability, and it behooves everyone to get as far away from the dollar as possible as fast as they can. “US foreign debt amounts to $20 trillion. What will be next? Who knows?” he said.

‘No one wants to hold rubles’

But it's easier said than done. Russia would like to be paid for its exports, especially oil, in a currency other than dollars. The new Russian government plan will reportedly offer tax incentives for Russian companies that do business abroad in rubles, which would boost the Russian currency and its international reputation.

“You can talk all you like about de-dollarization, but no one wants to hold rubles, which have lost value consistently over the past four years,” says Dmitry Oreshkin, head of the Mercator Group, an independent Moscow-based political think tank. “When you sign contracts, do business over a period of time, everyone needs a reliable currency that preserves its value. So we are talking about dollars, or maybe euros.”

Russia has succeeded in making the ruble the only currency for domestic transactions, and it has created a domestic payment system, the Mir card, which is independent from US-based international payment systems like Visa and Mastercard, and hence sanctions-proof. Yet the Mir card has only 400 participating domestic banks and companies, and is used mainly by the Russian government to pay its employees and pensioners.

“The ruble-dollar rate remains the standard for Russians. They might use rubles, but they think dollars,” says Natalya Orlova, chief economist for Alfa Bank, one of Russia's leading private commercial banks.

“This talk about de-dollarization doesn't mean it will be implemented. It implies that you should switch, it creates uncertainty, makes the dollar sound toxic. But in practice, it would be very complicated, and costly, and it would have to be very, very gradual.”

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