The real danger of Russian sanctions blitz lies in upending the US-led world order

Few countries outside Europe support the US-led sanctions amid a growing interest in ring-fencing national reserves with bilateral swap lines, particularly with China
This would inevitably erode the dollar’s importance as a global currency for trade settlements and lessen the dependence on Western-dominated financial channels

Anthony Rowley

Published: 3:30am, 28 Mar 2022

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When US President Joe Biden threatened his Chinese counterpart Xi Jinping with economic sanctions in the event that China should aid Russia in the Ukraine conflict, he was acting without apparent knowledge of economic history and the mixed record that sanctions have as a weapon of war.

Those being applied or threatened against Russia on an unprecedented scale by the United States and a few other nations risk having widespread and unintended consequences that could work in favour of China and others, eroding the post-war American dream of a US-led and globalised economy.

The “lack of non-Western enthusiasm for America’s approach to Mr Putin’s war is a phenomenon that US policymakers ignore at their peril”, Walter Russell Mead, distinguished fellow in strategy and statesmanship at the Hudson Institute in Washington, observed in a Wall Street Journal opinion piece.

Of the many countries in Africa, the Middle East, Asia and the Pacific Islands, only a handful have joined the US-EU economic, financial or monetary sanctions against Russia, according to former Goldman Sachs investment banker Kenneth Courtis – Japan, South Korea, Singapore, Australia and New Zealand.

Or, as Professor Keith McLay at the University of Derby in England wrote in a recent blog, “none of these measures [US-led sanctions against Russia] possess a direct link to the [Ukraine] war’s military realities in-theatre and the historical portends of the same are not encouraging”.

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Among the most important of what non-resident senior fellow at the Atlantic Council Hung Tran terms “unprecedented sanctions” imposed by the US, Europe and others on Russian entities, is denying Russia’s central bank access to part of its international reserves held in Western central and other banks.

This has prompted speculation, as Tran notes, about some countries’ efforts to move their international reserves into currencies deemed less vulnerable to possible US and Western sanctions. China and the yuan “have featured prominently in this discussion”, he adds.

The outcome, Tran says, could be a global proliferation of bilateral swap lines involving China, Russia and myriad trading partners which would be able to get round sanctions to a certain extent. This would inevitably erode the importance of the US dollar as a global currency for trade settlements.

So, even as the US and its allies stand their ground in creating a web of supposedly crippling sanctions on Russia, that ground may be being cut away from beneath their feet by a lack of universal support and an erosion of the global financial infrastructure.

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China, according to former Institute of International Finance executive managing director and International Monetary Fund deputy director Tran, already has bilateral swap line agreements with 41 countries worth more than 3.5 trillion yuan (US$550 billion).

These are arrangements where two central banks agree to acquire each other’s currency in exchange for their own. Traditionally, they have been used to supply foreign currency liquidity to a central bank to help avert financial instability.

Most important globally has been the network of bilateral swap lines maintained by the US Federal Reserve with the Bank of England, European Central Bank, Bank of Canada, Swiss National Bank and Bank of Japan, which have unlimited access to each other’s currencies; and with nine other central banks.

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There is also the Chiang Mai Initiative, launched as a set of bilateral swap lines among Asean members plus China, Japan and South Korea after the 1997 Asian financial crisis to supplement liquidity and which was later transformed into a multilateral arrangement called the Chiang Mai Initiative Multilateralised.

It would be ironic if these were to serve as models for Asia and other regions developing their own liquidity-buttressing networks that enabled them to lessen their dependence on Western-dominated financial channels. Yet this, in effect, is what appears to be happening.

07:14

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As Tran notes, China has developed a network of bilateral swap lines with several Asian countries – South Korea, Singapore, Indonesia, Malaysia and Thailand. The aim “is to foster local currency settlement arrangements of the bilateral trade of each of these countries with China”.

Dealing in yuan will also help Russia avoid sanctions on dealings in dollars, euros and pounds, even as it could expose Chinese financial institutions including the People’s Bank of China to secondary US sanctions.

As Meade wrote in the WSJ, “Western arm-twisting and the powerful effect of bank sanctions ensure a certain degree of sanctions compliance and support for symbolic UN resolutions condemning Russian aggression.”

Ukraine crisis: why Western sanctions are a double-edged sword

But, as he added: “The Biden administration appears not to understand the gap between Washington and what used to be called the Third World, the degree to which its own policies contribute to the divide, or the opportunities this gap creates for China.”

The series of reactive measures unleashed by successive US administrations – from Donald Trump’s trade wars to Biden-inspired sanctions – means it will take a long time to reconstruct a global economic order, and new or emerging players will be at the head of it.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs