Competition for US dollar intensifying
The US dollar is the most important unit of account for international trade, the main medium of exchange for settling international transactions, and the store of value for central banks.
As the target of US economic sanctions , Russia sees diversification from the dollar and into gold and other currencies, as a way of skirting trade restrictions. More evidence of Chinese and Russian de-dollarization concerns the SWIFT system of international banking transactions. In 2014 after Russia annexed Crimea, there were calls to cut Russia off from SWIFT. In response the Kremlin developed its own financial communications platform, SPFS. In December 2021, SPFS had 38 participants from nine countries. As of March, the system had 399 users. Russia is currently negotiating with China to join SPFS.
AsForeign Affairs puts it, "Deteriorating U.S.-Chinese relations incentivize Beijing to join with Moscow in building a credible global financial system that excludes the United States."Since 2018, the Bank of Russia has substantially reduced the share of dollars in its foreign exchange reserves, through purchases of gold, euros and yuan. As of March, 2022, Russia was the fourth largest holder of gold bullion, behind the US at no. 1, Germany, Italy and France.
Major Russian energy companies including Gazprom and Rosneft have stopped using the US dollar, with the euro now the primary vehicle of trade between Russia and China. At the end of 2020 more than 83% of Russian exports to China were settled in euros.A large part of the reason China and Russia want to become less dependent on US dollars, is America's declining status.
The Congressional Budget Office has warned that US federal debt is expected to hit 185% of GDP within the next 30 years, which seems entirely possible, given the current debt to GDP ratio is 123%. At the 14th BRICS summit in June, Russian President Vladimir Putin said"The issue of creating an international reserve currency based on a basket of currencies of our countries is being worked out."
He suggests the sanctions likely encouraged Moscow and Beijing to work on an alternative to the IMF's"special drawing rights". SDRs are based on a basket of currencies made up of the US dollar, the euro, the British pound, the yen and the yuan. Turner says a BRICS currency basket could attract the reserves not just of the group's members, but also countries already in their range of influence, including nations in South Asia and the Middle East.
Couple those changes with the frequent weaponization of the U.S. dollar through sanctions and the SWIFT system, and you can see why certain countries have been desperately looking for U.S. dollar alternatives. In short, the U.S. dollar feels like a lame-duck currency. We've already quoted experts who say that a new global currency could either be an alternative to the IMF's special drawing rights , or be used only for settling trades between nations as opposed to a reserve currency used by central banks.
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