Russia sanctions could undermine dollar’s global dominance: IMF

  • Sanctions on Russia could end up undermining the US dollar’s dominance, a senior IMF official told the FT.
  • Some countries are already renegotiating the currency in which they are paid for international trade, Gita Gopinath said.
  • It could also spur cryptocurrency adoption, but there’s still a regulatory gap, she said.

Sanctions on Russia over its invasion of Ukraine could undermine the US dollar’s dominance and spur digital currency adoption, according to a senior IMF official.

Harsh Western financial sanctions have frozen much of Russia’s foreign assets and hampered its ability to trade. While this has underscored the dollar’s power as the dominant global reserve currency, it has also been a wake-up call for countries that over-rely on it.

Gita Gopinath, IMF first deputy secretary, said there are signs some countries are already renegotiating the currency in which they are paid for international trade.

“The dollar would remain the main global currency in this landscape, but fragmentation at a smaller level is certainly possible,” Gopinath told the Financial Times in an interview published on Thursday.

Small blocs of currency between some trading partners are beginning to form, she added.

As countries accumulate reserves in the currencies they use for trade, they will play a greater role, diluting the dollar’s dominance.

The US currency’s influence has already waned over the past two decades, and its share of international reserves has fallen from 70% to 60%, according to the IMF official. In particular, the Australian dollar and the Chinese yuan have found their way into trading currencies.

More than 70 central banks hold some yuan as reserve currency, and many African countries and some in the Middle East regularly use the Chinese currency for transactions, according to Baizhu Chen, a professor of clinical finance and business administration at the University of Southern California.

“Some countries feel that because the dollar is dominant, their economies could become hostage to US politics, and countries want to diversify their risk,” Chen recently told Insider.

Continue reading: With the US dollar’s dominance in question, here’s how China’s yuan could become a global reserve currency – and why it wouldn’t all be bad

The US and its allies have blocked Russia from using SWIFT, a global communications service that handles international financial transactions – effectively banning it from international trade. The US also froze $630 billion in assets held in international reserves by the Central Bank of Russia.

Russia now requires payment in its currency, the ruble, for natural gas exports, and a senior lawmaker said Wednesday the ruble should be required for more commodities. Another Russian lawmaker has suggested buyers from Russia-friendly countries could pay in their own fiat currencies — or in bitcoin.

Gopinath said that the fallout from the Ukraine conflict should also drive cryptocurrency and stablecoin adoption around the world. However, she warned that there is a lack of regulation surrounding digital currencies that needs to be addressed first.

“All of this will receive even greater attention after the recent episodes, which brings us to the issue of international regulation,” she said.

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