Dollar weaponisation is creating a more fractured world

Using the dollar to punish countries or keep them in line is causing geopolitical rifts and fears, as seen in the spawning of payment and settlement alternatives
Yet what the world needs to rise to its many challenges is more engagement, dialogue and collaboration

Bernard Chan

Published: 8:15am, 21 Apr 2023

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Throughout history, currency standards have changed alongside the geopolitical order. Past international currencies have included the Chinese liang, Greek drachma, Roman denarii and Dutch guilder.

For much of the 19th century and the first half of the 20th, the British pound performed the role, and it was after the second world war that the historic Bretton Woods agreement established the US dollar as the global reserve currency through a system that, ironically, was developed so as not to disadvantage any country.

Today, an upswing in media coverage is evident in relation to the use of the dollar as a strategic tool to restrict or isolate the economies of nations that do not adhere to international law or US foreign policy.

Sanctions imposed by Western governments after Russia’s invasion of Ukraine resulted in key Russian financial institutions being excluded from the dollar-denominated Swift financial messaging service. Denying ordinary people access to international financial services has had a serious impact on their livelihoods with many goods and services becoming prohibitively expensive or simply not available.

It seems somewhat contradictory to use the global reserve currency to isolate an entire nation while countries are still buying its oil and gas. However, neither is it acceptable for a nation to use natural resources as a threat to other nations.

While a majority of the world’s strongest economies have fallen in line with the policy in relation to Russia, not everyone shares the same opinion. Such geopolitical acts further deepen divides and make it even harder to engage in meaningful dialogue and overcome complex challenges.

Chinese President Xi Jinping and Russian President Vladimir Putin toast at their dinner at the Palace of the Facets in Moscow on March 21. China has refused to join the US and its allies in imposing financial sanctions on Russia over the Ukraine war. Photo: AP

The European Union was opposed to the United States using similar tactics in 2018 when it withdrew from the Iran nuclear deal and immediately isolated the country from the global financial system. Unfortunately, there was little they could do at the time, apart from conveying their dissatisfaction.

Rising geopolitical tensions and sustained escalation in the rhetoric between the US and China have raised fears among many nations of an unnecessary confrontation between the two superpowers. The use of the dollar to restrict or isolate has given fresh impetus to the creation of alternative payment and settlement systems, not least the e-CNY trial by China.

So now, we have China, the world’s second largest economy, and Russia, the world’s second largest gas producer and exporter, actively using alternative payment and settlement arrangements, and exploring Swift alternatives with others.

India, for example, has mostly been buying oil from Russia using non-dollar currencies. The yuan pricing of oil from Saudi Arabia was discussed during President Xi Jinping’s recent visit last December. China has become Saudi Arabia’s largest trading partner even as the kingdom has grown into China’s largest supplier of crude oil at over three times the volume it supplied to the US last year.

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It was interesting to note a fracturing of opinion during French President Emmanuel Macron’s recent visit to China, where he prevailed on his EU counterparts to think carefully about their strategic role, economic interests and strategic autonomy.

World Bank chief economist Indermit Gill is of the view that “a lost decade could be in the making for the global economy” as a result of the economic turmoil.

According to the International Monetary Fund, dollar reserves held by central banks have fallen to 58 per cent, its lowest level in at least 25 years, raising questions about its long-term position. This is seen by some analysts as a reflection of the increasing role played by alternative currencies in international transactions.

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Meanwhile, the internationalisation of the yuan continues, supported by China’s growing imports and exports, investments in Belt and Road initiatives, expansion of yuan-clearing banks, improved trading and settlement systems for cross-border investment and financing, among other measures.

Last month, China brokered the deal to normalise relations between Saudi Arabia and Iran, a positive development in an often-troubled region. It was a complex situation that required skilled diplomacy to achieve a peaceful and satisfactory outcome. It also required significant trust on all sides.

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This is a commodity that seems to be in increasingly short supply in international relations. These negotiations also reflect China’s recent willingness to play a greater role and leverage its economic power in such situations.

It is becoming increasingly evident that the international community would benefit greatly by increasing engagement, dialogue and collaboration, so that we can work together to resolve the multitude of complex challenges that we face together and which affect us all, be it conflict or climate change.

Bernard Chan is a Hong Kong businessman and a former Executive Council convenor