How sanctions on Russia have affected the US Dollar

The war in Ukraine will surely harm the US Dollar, but the damage is not yet visible as opposed to that of the ruble.

 A view shows a Russian rouble coin and a U.S. dollar banknote in this picture illustration taken October 26, 2018. (photo credit: REUTERS/MAXIM SHEMETOV)
A view shows a Russian rouble coin and a U.S. dollar banknote in this picture illustration taken October 26, 2018.

Prominent among the (non-human) casualties of the Ukraine war is the US dollar. However, the damage to the dollar – and, by extension, to the ‘architecture’ of the entire global financial system – differs in two critical ways from that suffered by or inflicted on the numerous other economic, financial and commercial casualties to date.

First, it is not yet visible. Whereas the damage to the ruble – the most obvious currency casualty – has been in plain sight, while other economic and commercial destruction has been similarly reflected in their prices on markets from grains to shipping rates, the dollar’s price has not fallen. Vis-à-vis most other currencies, it is higher than it was before the invasion.

Second, in sharp contrast to most of the damage generated by the war, that inflicted on the dollar’s global standing has been the work of the American government – not Putin or Russia or any other foreign entity.

What is this mysterious damage that cannot be seen and is self-inflicted? Simply that the United States has “weaponized” the dollar. It is using the dollar as a weapon in its efforts to persuade Russia to desist and/or to punish it for what it has already done.

This development has to be seen in the wider context of NATO and the West choosing to weaponize trade and other economic activities, by imposing boycotts on and embargoes of Russian products, goods and services, as well as placing severe sanctions on Russian entities – companies and specific individuals in the political, military and business spheres. All this, while no state of war has been declared between the US or NATO as a whole and Russia. In other words, the relevant comparison must be with the Cold War period, not with World War II or any other “hot war.”

 A model of the natural gas pipeline is placed on Russian Rouble banknote and a flag in this illustration taken, March 23, 2022. (credit: REUTERS/DADO RUVIC/ILLUSTRATION/FILE PHOTO) A model of the natural gas pipeline is placed on Russian Rouble banknote and a flag in this illustration taken, March 23, 2022. (credit: REUTERS/DADO RUVIC/ILLUSTRATION/FILE PHOTO)

Even in this context, the use of trade, commercial and other sanctions are not new, they are commonplace. Whether and to what extent they are effective is open to discussion. The Castro brothers – the late Fidel and the retired Raoul – would likely argue that they are actually counter-productive, but that’s not the topic here.

The use of trade sanctions as a weapon specifically against Russia has run into two big problems, both relating to non-compliance by other countries with American initiatives. There is political non-compliance on the part of many countries (China, India, Brazil, Saudi Arabia, etc.) that don’t want to comply. Then there is the practical non-compliance of most of Europe, on the grounds that although they want to, they simply cannot cut their energy links with Russia.

But the weaponizing of the dollar is a different ball game. It involves excluding Russia from the global financial system that America constructed and largely controls, and in which the US dollar is the dominant global reserve currency. A key aspect of that dominance is that most global trade is conducted in dollars and all the dollar-denominated transactions are cleared through New York.

WEAPONIZING THE dollar is unprecedented. During the Cold War, even when the USSR crushed uprisings in East Germany, Hungary and Czechoslovakia, indeed even when it invaded a non-Soviet-bloc state such as Afghanistan, the response included boycotts (e.g. the Moscow Olympics) and other measures – but there was no wholesale seizure of USSR-owned financial or real assets. It was doable, but unthinkable – then.

Now, however, it has been done, yet it is not considered shocking. That’s because the use of American economic and financial dominance as a tool of foreign and security policy has become so routine as to be standard procedure. This goes back at least as far as 9/11 and the “War on Terror,” but more recently has become a regular feature of American policy, deployed against any individuals (bin Laden), organizations (ISIS, IRGC) or countries (Venezuela, Iran) that the US decides it doesn’t like.

That this tool has been wielded against a major country, rather than a second-level state, marks an irrevocable change in the world order. Even if the justification for the action was universally agreed (it never is), its repercussions are far-reaching and very long-lasting.

Let’s take one of the most serious consequences of weaponizing the dollar: For the last 25 years, since the traumatic Asian financial crisis of 1997, developing countries have sought to amass large quantities of foreign currency reserves, designed to protect them against volatility and disruptions during global financial crises. Those reserves are composed primarily of US dollars, invested primarily in US Treasury bonds and held primarily within the US financial system.

The American sanctions against Russia have demonstrated that your reserves, your investments and your bank deposits are only conditionally yours. If you run afoul of Uncle Sam, or maybe just support a country the Americans are sanctioning, or maybe just fail to join American sanctions, you may be denied access to what you thought was yours.

Once trust is lost, once doubt enters the equation, the entire relationship changes. Better safe than sorry is the obvious preference. Therefore, you will prefer to reduce your exposure to the US dollar, US government debt and the US financial system as a whole. You will seek alternatives, such as keeping more of your reserves in real, rather than financial, assets – think precious metals, stockpiles of commodities, even Bitcoin, if you consider that “real” – and you will also seek to reduce the share of trade you conduct in dollars, in favor of alternatives.

True, all those alternatives are inferior – that’s why you preferred the dollar. Until now, when concerns created by the US government crept in.

As noted, these and other consequences are not yet visible – but that doesn’t mean they don’t exist. They do, they are underway and they are negative for the entire world, but first and foremost for the United States.

The writer is an independent economic consultant based in Jerusalem. He can be reached at [email protected]