U.S. Sanctions on Russia Threaten Dollar’s Global Dominance as Nations Reconsider Currency Diversification

Originally published May 25, 2023 7:44 am PDT

Sanctions imposed on Russia under the Biden administration, following Russia’s military action in Ukraine, have shaken the foundation of the U.S. dollar’s global dominance.

The freeze of half of Russia’s $640 billion in gold and FX reserves ignited fears in nations, leading to a strategic re-evaluation of their reliance on the dollar.

Stephen Jen, CEO of Eurizon SLJ Capital Limited, detailed, “What happened in 2022 was a very sharp plummeting in the dollar share in real-terms,” indicating that these changes came as a direct response to the sanctions imposed on Russia.

This reaction engendered a major reassessment regarding currency diversification in nations such as Saudi Arabia, China, India, and Turkey.

Currently, countries rely on dollar reserves to safeguard their economies during crises, and commodities trade in dollars ensures stable prices and controls inflation.

However, the sanctions against Russia have created fissures in this system.

The United States has amplified its punitive actions against Russia, thus creating such fissures, with a sweeping series of economic sanctions aimed at crippling the country’s financial capabilities.

The U.S. Treasury has implemented over 2,500 sanctions as a response to Russia’s aggression.

As a centerpiece of these measures, the Treasury has disallowed Russia from utilizing funds under U.S. jurisdiction for making debt payments.

In an aggressive move, the United States has also blocked Russia’s access to frozen funds in American accounts for debt payments.

Further tightening the economic vice, the U.S. has barred new investments in Russia.

In a bid to isolate Russia’s financial operations further, sanctions have been leveled against the country’s central bank, effectively freezing the bank’s assets within the United States and barring American entities from conducting any business with it.

Additionally, the U.S. aims to increase tariffs on over 100 Russian metals and minerals.

The U.S. has imposed a total ban on Russian oil and gas imports.

It has also sanctioned over 1,000 Russian individuals and businesses. Assets of these targeted entities within U.S. jurisdiction have been frozen, their travel to the U.S. prohibited, and all business dealings barred.

Moreover, America’s chief geopolitical rival, China, is capitalizing on these sanctions and related embargoes.

As Russia seeks to recoup lost revenue, it’s selling massive quantities of oil to China at significantly reduced prices.

“Sanctions are certainly not deterring Russian forces from the kind of military operation they’re carrying out,” said president of the Center for European Policy Analysis Alina Polyakova. “Most governments broadly miscalculated the perspectives or the worldview of the Russian elite and what Putin cares about.”

“It has been clear for a very long time that Putin and the people around him don’t care about economic growth. What Putin and the elites care about is revenue, and they’re still getting revenue from energy sales.”

If nations decide to shift away from the U.S. dollar as a reserve currency due to these concerns, it could potentially undermine the dollar’s standing as the global economic anchor, affecting U.S. economic influence and potentially disrupting global financial stability.