Time for a non-aligned financial system

The story of the Russia-Ukraine war is unfolding as the plot of Homer’s Iliad rewritten by renowned science fiction writer Issac Asimov. Russia, it seems, is orchestrating not just military attacks but cyber warfare as well. Ukraine retaliated with automated drones, while the US and EU launched a concerted financial war to contain Russia.

The Russia-Ukraine war is demonstrating a new world order where automation, information technology, narrative control and finance will dictate the winner of the game of thrones. This worries countries outside the US-led alliance.

“If used too widely, sanctions can reverse the process of globalization that has allowed the modern world to thrive,” wrote former Reserve Bank of India (RBI) governor Raghuram Rajan in a recent essay. Current Governor Shaktkanta Das warned of over-reliance on the US dollar and said the RBI was diversifying its foreign exchange reserves.

The important question is, is India ready for financial warfare if it finds itself on the wrong side of a superpower in the future? What does war mean for countries like India that are not part of the great power game?

De-dollarization on cards

Ironically, in the war between Russia and Ukraine, the US dollar may be the loser as nations realize the importance of diversifying foreign exchange reserves. Russia’s expulsion from the SWIFT financial system and the decision to freeze Russian exchange by the US and its allies revealed the glaring risks associated with dollar hegemony for central banks around the world.

An interesting conundrum in today’s world is that the more productive a country is, the more it exports. The more you export, the more surplus forex you have. The more surplus you have, the more you invest abroad. Dollar hegemony ensures that the preferred destination for these investments is the US The trend accelerated after the 1997 Asian financial crisis scared developing countries into hoarding hard currency to protect their currencies from crashes, pushing official reserves below US$ 2 trillion to a record $12.9 trillion in 2021, according to the IMF.

Although central banks have lately been looking to buy more gold, it still only accounts for 13% of their forex assets. Foreign currencies are 78%. The rest are Special Drawing Rights (SDR), a claim created by the IMF. Russia is more diverse, however. According to the Bank of Russia, the country holds 21.7% of its assets in monetary gold, 21.7% in euros, 6.6% in US dollars, 10% in yen and 14% in renminbi.

According to Jefferies Greed and Fear report, China with $3.2 trillion, Saudi Arabia with $447 billion and India with $632 billion are some nations with the biggest forex reserves. They hold US Treasuries worth $1.07 trillion, $199 billion and $119 billion, respectively.

China and Russia have already started moving away from the dollar and SWIFT. After the Russia-Ukraine war, more countries may find merit in this strategy. Nations have understood that, with the exception of gold, foreign currency assets are the responsibility of someone else, someone who may simply decide they are worthless.

In an exclusive discussion with Fortune India, World Gold Council Research Head Joan Carlos Artigas says the US dollar’s role in international trade is well established, but is slowly moving towards a more “multicurrency” system, especially with growing relevance of China in international trade.

In 2016, China’s renminbi became the first emerging market currency to be included in the SDR. The others are US Dollar, Euro, Yen and Pound Sterling. China advocates using the SDR basket as a global reserve currency. China’s long-term strategy is to peg the currencies of its main trading partners to the renminbi, while the renminbi itself is pegged to this super sovereign reserve currency.


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