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Thursday, May 26, 2022

IMF Warns Sanctions Against Russia to Weaken Dominance of Dollar

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The recent financial sanctions imposed on Russia for its invasion of Ukraine are threatening to weaken the dominance of the U.S. petrodollar as the world currency, said First Deputy Managing Director Gita Gopinath of the International Monetary Fund (IMF) to The Financial Times.

The sanctions may result in a more fragmented international monetary system, warned Gopinath.

She had previously said that the sanctions against Russia would not foreshadow the demise of the dollar as the world’s reserve currency and that the Ukraine crisis would slow growth, but not cause a global recession.

The United States, the EU, and the Group of Seven nations have hit Russia with a bundle of heavy sanctions and blocked the country from using SWIFT, the global communications service that clears international financial transactions, virtually cutting it off from the global financial markets and international trade.

The United States also froze assets held in international reserves by the Russian Central Bank.

The Russian government is retaliating by demanding payment in rubles or gold for purchases of energy and other important commodities.

The ruble has since risen to a three-week high past 95 against the dollar after the Moscow Stock Exchange reopened after the initial round of sanctions.

Russia had been planning for years to reduce its dependence on the petrodollar since the United States imposed sanctions in retaliation for its annexation of Crimea in 2014.

The current crisis in Ukraine has only accelerated those plans.

Before the recent conflict, Russia still had roughly a fifth of its foreign reserves in dollar-denominated assets, mainly held overseas in Germany, France, the UK, and Japan, which have since sided with the United States to isolate Moscow from the global financial system.

Gopinath of the IMF said that Russia’s response to the sweeping sanctions could encourage the emergence of small currency blocs based on trade between separate groups of countries and would lead to further diversification of the reserve assets held by national central banks.

“Countries tend to accumulate reserves in the currencies with 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 towards other currencies playing a bigger role [in reserve assets],” she said.

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