Is the Russia-Ukraine Crisis a Turning Point for the Dollar?

American Consequences's Photo
by American Consequences
Wednesday, Mar 02, 2022 - 15:35

By Kim Iskyan

The Russia-Ukraine war is the no más moment for the U.S. dollar... when the glacial shift of global investors – and, more importantly, governments –toward a bi-polar global financial system, at the expense of the dominance of the dollar, gets underway for real.

Central banks around the world hold reserves – in currency or precious metals – so they can trade goods abroad or invest in other countries. Some central banks also use it to maintain exchange-rate pegs. Around 59% of the $7 trillion held by governments around the world in reserves are held in U.S. dollars.

Seven different countries use the U.S. dollar as their official currency, while 65 others peg their national currencies to it. And greenbacks are the world economy's most important medium of exchange, unit of account, and store of value. If they don't use U.S. dollars, it's a lot more difficult – and expensive – for countries, companies, and people to buy oil or gold, sell toys or cars, or invest in hotels or bridges.

The dollar has been the world's reserve currency for more than a century. But now, the clock is ticking.

Russia Gets the Boot

The sanctions imposed by a coalition of the U.S. and Europe are hip-checking Russia out of the U.S. dollar ecosystem. Many Russian banks have been cut from the SWIFT financial messaging system, which makes transferring cash a lot more challenging. And other measures are making it more difficult for Russia to access its $630 billion in foreign currency reserves – which were supposed to be the lifeboat of the country's economy in the event of a financial catastrophe.

And as a result, Russia's slow shift towards a more welcoming neighbor, China, is accelerating. China is already Russia's biggest trade partner, for both exports and imports.

In 2019, the two countries signed a deal to settle trade in their own currencies – rather than the U.S. dollar. And in 2020, 17.5% of the trade between the two countries were settled in yuan, up from 3.1% in 2014.

Russia will likely lean heavily on China's cross-border yuan clearing and settlement system, CIPS. For now, it mostly still largely relies on SWIFT, but CIPS has the scope to operate independently and have its lines of communication line with financial organizations.

China has long been a big buyer of Russian fossil fuels and minerals. Tacit Chinese support (or, at least, a speaks-volumes silence) of the Russian invasion of Ukraine underscores the "friendship without limits" the two countries announced earlier this month.

A Big Step for China

The shift of Russia to the China column would be a major step towards what the Financial Times calls "China's long-term goal of building a post-dollarised world."

And that just part of China's plan... as the FT continues...

"Finance is a key pillar in the new Great Power competition with America; currency, capital flows and the Belt and Road Initiative trade pathway will all play a role in that... Beijing has been trying to bolster trust and transparency in its own system, not only to attract non-US foreign investment, but also to encourage an onshore investment boom... "

The reserve currency status of the U.S. dollar is an extraordinary and unique boon for Americans and the American economy. America is able to borrow, seemingly endlessly, from everyone else to create new dollars. The U.S. government is able to defer repaying its lenders by constantly rolling over – and increasing – its debt, seemingly forever.

It's a Warning

It's been a great run for the U.S. dollar. It's been the world's reserve currency for far longer than history's previous reserve currencies.

But now the global economy is witnessing in real time what happens to countries that fall afoul of the U.S. dollar – or rather, of the government behind the U.S. dollar. Russia is well on its way to becoming a financial pariah. And governments that want to limit the risk of ever falling victim to a western-led economic shock-and-awe campaign will do the necessary – and reduce their exposure to the dollar.

And that's the beginning of the end of the U.S. dollar. It won't be quick... but three decades from now, we'll look back and say: The Russia-Ukraine war was the turning point.

Editor's note: Most Americans are going about life, business, investing, and retirement planning as if nothing unusual has happened to our financial system.

And few seem to realize the repercussions of the trillions being pumped into the U.S. financial system in the past 18 months.

So consider this your wake up call...

Billionaires including Warren Buffett, Stanley Druckenmiller, Paul Tudor Jones, Bill Ackman, and more have all stated publicly that Americans aren't paying enough attention to this development.

Which is why one former Goldman Sachs trader has written an important new 12-page report explaining what he believes is coming next, a frightening phase he calls: "Financial Lockdown."

Click here to receive a copy of this new report, and read it to find out:

  • How millions of Americans are about to be pushed out of the middle class...out of private retirement and private health care...and out of a decent life based on independence and privacy.
  • Why this is happening and why this is the single most important financial story in the world today.
  • And the 4 steps he says you should take right now to protect and grow your money in the coming months.
Contributor posts published on Zero Hedge do not necessarily represent the views and opinions of Zero Hedge, and are not selected, edited or screened by Zero Hedge editors.