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Western sanctions against Russia could reduce the dollar’s dominance by allowing countries to become used to paying for imports using other currencies, Gita Gopinath, the International Monetary Fund’s first deputy managing director, said in a Financial Times interview.
“The dollar would remain the major global currency even in that landscape,” she said, “but fragmentation at a smaller level is certainly quite possible.”
“We already are seeing that, with some countries renegotiating the currency in which they get paid for trade,” she noted.
Russia has demanded European nations pay for gas imports in rubles, not the euros or dollars stipulated in the sales contracts. Russia and India are working out an agreement that will allow them to pay each other in their own currencies, as we reported in “Russia, India Forming New Trade Ties” (22 Mar 2022).
The trend will diversify the currencies central banks keep on hand, Gopinath added.
“Countries tend to accumulate reserves of the currencies in which they trade with the rest of the world, and in which they borrow from the rest of the world, so you might see some slow-moving trends toward other currencies playing a bigger role” as reserve currencies, she said.
Although Russia’s ruble cratered immediately after Russia invaded Ukraine, the currency has since recovered all of its value, due to trade with China, India, and others as well as Russia’s internal financial manipulations.
The dollar’s supremacy will remain unchallenged for the “medium term,” Gopinath said, but its value will lessen as more countries become accustomed to making trade transactions in other currencies.
TREND FORECAST: As we said in “China’s Digital Yuan Could Challenge Dollar’s Leadership” (27 Jul 2021) history shows that the currency of the world’s leading economy also becomes the world’s reserve currency for international trade.
In 1890, when Britannia ruled the waves, the pound sterling was the standard; after World War Two, when the U.S. had the only large, functioning economy, the dollar rose to prominence.
All signs indicate that China will overtake the U.S. sometime in the next 10 to 15 years as the world’s largest economy. When that happens, the dollar will be dethroned and the yuan or renminbi will be crowned the world’s new reserve currency.
The new trade deals that Russia is making with India, China, and other nations will speed the dollar’s weakening position and strengthen China’s case that its yuan should rule the world’s economy.