Will the Dollar Lose its Position in the Global Economy?

The conflict between Ukraine and Russia has had an impact on the global economy, not only in markets and transactions but also because it has sparked a discussion about the role of the dollar as the world's main currency. Russia's “defensive” actions towards sanctions, the possible alternatives that China has, and the devaluation of the dollar pose a new global configuration at the monetary level.

The Dollar Against the Russian-Ukrainian Conflict

The dollar has become one of the United States' cards to pressure Russia in the conflict with Ukraine. Russia continues to use the dollar for its main transactions, including the sale of gas mainly to Europe. However, in the face of growing sanctions, it has decided to request payment for fuel in rubles, a measure that the United States government has described as "terrorism" . Russian industry is only just beginning to feel the weight of US sanctions, so actions by the Russian government will be crucial to prevent the economy from sinking rapidly. Until today, the Russian economy has remained afloat thanks to gas and oil, which continue to have high prices, in addition to the tight control of the country's financial authorities.

Reserves in Dollars

In the list of the first ten countries that have the most international reserves in dollars are China, India and Russia. Three of the countries that have sought to reduce their dependence on the dollar. The sanctions against China during the Donald Trump government and those accumulated by Russia since the annexation of Crimea in 2014 have accelerated the intention of these countries to depend less on the US currency. It is not an action that can be taken overnight, China is one of the largest exporting powers, so the use of the US currency is still a strategic part of its trade, its reserves have remained stable since 2020 with 3.2 trillion dollars on average, according to data from the World Bank.

For Russia, the story is not the best, the outlook for the conflict is linked to sanctions. The US Treasury has blocked Russian sovereign debt payments through its frozen accounts, which could cause the country to default. Between the frozen assets in the United States and the United Kingdom, the figure adds up to some $650 billion dollars that Russia will need and that it will have to cover with the dollars it has in its possession. The United States thus uses the power of its currency to put pressure on the Russians.

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The Alternative of Russia, China and India

While the US government printed more dollars to deal with the pandemic, with a slow recovery and rising inflation, China on the other side of the world began a powerful recovery. In a scenario that seemed difficult, Russia invaded Ukraine, but not before preparing for the sanctions that would obviously come with it. 2014 was a good laboratory, China and India have increased their trade with Russia, the opportunity left by withdrawing western companies is unique, with the addition that the transactions can strengthen the ruble and the renminbi by avoiding the use of the dollar .

The growth of the yuan as a reserve currency, trade between Russia, China, India and several of their neighbors would help avoid Western sanctions on the Russians. However, as the researcher Miguel Otero Iglesias from the Elcano Royal Institute in Spain points out, the "sanctions war" could become a race of resistance between Europe and Russia , where the Russian economy that it considers closed has an advantage by depending less on the abroad and have a strategic partner in China. He even points out that the Russian industry has begun to cover what the foreign industry at the moment cannot. Thus, Russia will seek to survive with its reserves and control of its economy, although the loss of purchasing power and the impoverishment of the population may not last so long.

A Future Without a Dollar?

The dollar is in a long process of devaluation, China and Russia, mainly, are looking for alternatives in monetary terms to depend less on the management of the US currency. However, the outlook is still far from being lapidary for this currency. Despite this, other mechanisms are here to stay, although they are still far from displacing the dollar. Minerals such as gold are finite, according to the World Gold Council, around 205 thousand tons of gold have been mined in history, 17% of that total is part of the national reserves, that is, 34 thousand tons. According to the Council, some 50 thousand tons remain to be extracted in the world. The gold standard was abandoned long ago and despite the fact that the mineral does not lose its value, it is difficult to return to that system against the dollar beyond using it as a reserve.

Instead, one of the most competitive bets are cryptocurrencies, digital currencies whose main objectives are not to depend on the dollar-based system, the central banks or the authorities of any country. Their main asset is the use of technology that makes them infallible against attacks, fraud and speculation, thus avoiding the traditional problems associated with traditional currencies. Still, cryptocurrencies are far from replacing the dollar, they still have a long way to go before they pose a threat.