With the sanctions against Russia, alternatives to the dollar have been found. But the dollar remains unparalleled as long as the United States remains the pole of global stability.
The conflict in Ukraine has generated heavy economic sanctions against Russia, which has de facto excluded it from a large part of the international financial system and from the use of the dollar, which was the backbone of this system since 1945.
In practice, the only foreign exchange supply to Russia is primarily linked to energy or raw materials in general, with the exception of agricultural products whose traffic passes through the Black Sea ports, which are inaccessible due to the conflict and the inability to insure the cargoes.
To limit the outflow of currency as much as possible, the Russian authorities have sought to rapidly develop alternatives to the dollar and to the global financial infrastructure dominated by the United States, such as the SWIFT interbank payment system. This is how they declared that they are now in favor of the use of the Chinese CIPS system and the Yuan for trade with China.
China took advantage of these circumstances until March 15, 2022, to relaunch its project to get Saudi Arabia to agree to invoice its oil exports to the Middle Kingdom directly in Yuan. A major challenge for the Kingdom, which leads 25% of its black gold exports there. And a profound change for the commodity market.
If this project were to be realized, it would definitively sanctify the trend towards the end of the globalization of commercial exchanges. The world is becoming more and more regionalized around the two dominant economic powers, the United States and China, where Europe is still lagging behind due to lack of political power capable of supporting and giving financial credibility to its economic weight.
But if it is no longer the only currency in world trade, the dollar remains crucial in the financial world and its place is not in danger. And this for three main reasons.
Firstly, because the United States remains the world’s most important financial market: nowhere in the world does it offer so many different markets, so many and active participants, and consequently so much liquidity and depth of all kinds of fixed income.
When major crises are triggered (government debt, CoVid, Ukraine), investors’ first instinct is to turn to the dollar and government bonds, the first havens in case of uncertainty. Thus, the dollar still accounts for 60% of the world central banks’ foreign exchange reserves.
Second, because its competitors suffer from errors that are currently too glaring to constitute a credible alternative.
China is pushing the yuan, but the strict control of the capital of the country and the partial unconvertibility of its currency, which is still strictly monitored by the country’s monetary authorities, can not give confidence to international investors. The euro has been punished by the financial and political fragmentation of the EU. And cryptocurrencies are far too volatile – and in the case of bitcoin potentially deflationary because of its strictly limited amount of construction – to be more than a backup currency under very specific circumstances.
Thirdly, due to the political, legal and military stability of the United States, the balance of power, the strength of the rule of law … and the impressive number of aircraft carriers (11 currently in service out of the 16 deployed in the world!) Constitute incomparable assets for the dollar.
Be careful though, because this last pillar for several years seems to have been weakened in terms of institutions and the rule of law. Political divisions, sensitive since Bill Clinton’s last term in 1996, were greatly strengthened under the terms of Barack Obama and Donald Trump. The competition – including legal – of the 2020 election, which culminated in the violent invasion of the Capitol on January 6, 2021, gave the impression of a divided country and laws of mercy the goodwill and personal ethics of a few key political actors. .
Therefore, although it still appears very solid, the dollar as the cornerstone of the international financial system is not immortal, and the worsening of the country’s ruptures could lead to a new monetary world. The euro, backed by a very strong European legal architecture, has other advantages than the Yuan and would not start being beaten in a new race for leadership.
But the time is not right because monetary reputation is resilient and the United States has not said its last word. So much the better, because the world and the markets prefer not to have to face more uncertainty!