Unintended consequences: Sanctions on Russia hurt US dollar dominance
The US dollar, the dominant global currency since 1944, may lose some of its luster due to the American-led sanctions against Russia over the turmoil in Ukraine. The greenback has been fading in favor since the global financial crisis in 2008.
The US-led sanctions against Russia may have backfired on the US because it threatens to “hasten a move away from the dollar that’s been stirring since the global financial crisis [in 2008],” Rachel Evans at Bloomberg wrote. In an unexpected turn of events, Hong Kong’s central bank has bought more than $9.5 billion since the start of July “to prevent its currency from rallying as the sanctions stoked speculation of an influx of Russian cash,” she noted.
“OAO MegaFon, Russia’s second-largest wireless operator, shifted some cash holdings into the city’s dollar,” according to Bloomberg. “Trading of the Chinese yuan versus the Russian ruble rose to the highest on July 31 since the end of 2010, according to the Moscow Exchange.”
In March, after Crimea voted to secede from Ukraine and join Russia, the US and European Union imposed visa restrictions on Russians and Crimeans whom they considered “most directly involved in destabilizing Ukraine, including the military intervention in Crimea.” America and the EU expanded their economic punishment later in the month, as well as twice in April, once in May and twice in July, according to Debevoise & Plimpton, an international financial law firm.
In the latest round of sanctions, issued on July 29, the European Union imposed broader sanctions to “limit access to EU capital markets for Russian State-owned financial institutions, impose an embargo on trade in arms, establish an export ban for dual use goods for military end users and curtail Russian access to sensitive technologies particularly in the field of the oil sector.” President Barack Obama announced the US would also be “blocking the exports of specific goods and technologies to the Russian energy sector,” “expanding sanctions to more banks” and “suspending credit that encourages exports to Russia.”
The dollar’s dominance has shrunk over the last 13 years, from 72 percent of global currency reserves to 61 percent today, threatening the position that the greenback held since the Bretton Woods Conference in July 1944, when delegates from 44 Allied countries met in New Hampshire to hammer out a way to regulate the international monetary and financial order after the conclusion of World War II. Each signatory agreed to adopt a monetary policy that maintained the exchange rate by tying its national currency to the US dollar and to prevent competitive devaluation of its money. At the time, the dollar was pegged to the price of gold. In 1971, President Richard Nixon took the US off the gold standard, and the American banknote became the reserve currency around the world. Certain commodities, like oil, are priced in US dollars, regardless of the country of origin.
“The crisis created a rethink of the dollar-denominated world that we live in,” Joseph Quinlan, chief market strategist at Bank of America Corp.’s US Trust, which oversees about $380 billion, told Evans. “This nasty turn between Russia and the West related to sanctions, that can be an accelerator toward a more multicurrency world.”
The wording of the economic penalties may also negatively impact the greenback’s standing as the world’s reserve currency.
Historically, US sanctions prohibit companies from using US dollars in the targeted country (like Iran or Sudan), Frances Coppola wrote in Forbes in mid-July. But the present sanctions on Russia focus on “US persons” providing companies with long-term financing in any currency. Some of the targeted businesses include those in the energy industry, including Rosneft and Novatek, and those in the financial industry, like Gazprombank (the financial arm of gas giant Gazprom) and the Russian state development bank.
“It is perhaps not obvious why an energy company would want to borrow in Euros, since oil and gas are priced in dollars,” Coppola wrote. “But borrowing in Euros could be a way round the sanctions.”
Banks could also use derivatives “or even just basic foreign exchange facilities,” she added. But with the EU joining in on the sanctions, Euro funding may be “rather hard to come by.” But, Coppola noted, “It’s still clever.”
