Long live the slowly dying and unlamented US dollar

When the US announced sanctions on Russia’s dollar reserves following the Ukraine War, only 17% were held in USD with the remaining held in euro, yuan, sterling and gold.
When the US announced sanctions on Russia’s dollar reserves following the Ukraine War, only 17% were held in USD with the remaining held in euro, yuan, sterling and gold.


US sanctions set off a hunt for options and encouraged multipolarity but the USD will still reign

A quiet but significant milestone was passed last year. For the first time in decades, by one estimation, the US dollar’s share in international reserves fell below 50%. Stephen Jen, a well-known currency analyst, estimates that the USD fell from about 73% of international reserves in 2001 to less than half in 2022. Jen argues that the dollar’s stunning drop was seemingly quickened after the US decided to weaponize the dollar-based financial system against Russia. For emphasis, Jen says “what we witnessed in 2022 was sort of a ‘defund-the-global-police’ moment, whereby many reserve managers in central banks around the world disagreed with the conduct of both Russia and the US."

In tandem, there has been much news of bilateral currency deals where commercial, trade and financial flows will take place without being intermediated by the dollar. China has dramatically increased its use of yuan to buy Russian commodities including oil, coal and some metals. A significant portion of their roughly $90 billion in commodities trade will now be settled in yuan. The yuan’s share in Russia’s import settlements has now risen to almost 25% and is expected to rise further.

Bilateral Swap Lines (BSLs) are arrangements whereby two countries agree to exchange currencies with one another, up to a pre-agreed limit or without any limit. BSLs were pioneered by the US Federal Reserve to ensure that the Fed and the Bank of England, Bank of Japan, European Central Bank, Bank of Canada and Swiss National Bank would have unlimited access to each other’s currencies during liquidity crunches or times of crisis. Even today, the International Monetary Fund uses BSLs as a major tool to lend to countries in crisis.

The gradual internationalization of the yuan began after the Global Financial Crisis (GFC) in 2008. The People’s Bank of China (PBoC) has expanded BSLs to over 40 countries since then, including to South Korea, Indonesia, Singapore, Malaysia and Thailand. The goal here is to nurture local currency settlements of bilateral trade of each of these countries with China and encourage them also to do it with one another as they could use the yuan for other international purposes. A 150 billion Yuan BLS with Russia after the Crimean War in 2014 has allowed Russia to diversify away from the dollar. When the US announced sanctions on Russia’s dollar reserves following the Ukraine War, only 17% were held in USD with the remaining held in euro, yuan, sterling and gold. India too has created a small BLS network within the SAARC group. The scope is limited to a total of $2 billion in swaps available in USD, euro or rupee. Its primary purpose is financial stability (not internationalization), and Sri Lanka has already availed about $400 million of the BSL to tide over its macro-economic crisis. Russia and a few other countries directly use China’s Cross-border Interbank Payments System (CIPS), fully bypassing Swift for these payments. Russian banks now routinely issue credit cards using the Chinese Union Pay settlement system after Visa and Mastercard have withdrawn from Russia. On Swift, the dollar still represents 45-50% of payments and along with the euro, yen, sterling, Canadian dollar and Swiss Franc, makes up over 85% of all transactions. The yuan makes up 2% of Swift payments today.

India has had a ‘trade barter’ system with Russia for decades, going back to Soviet era, when bilateral trade was marked in local currency but not really ‘settled’. Last year, the Reserve Bank of India (RBI) announced a mechanism to settle overseas trade in rupees. However, very little activity has taken place with Russia because India’s trade deficit with Russia has risen directly with oil imports and the Russian Central Bank does not want to accumulate rupees as reserves. India has begun to settle some of these purchases in yuan, presumably using market-acquired yuan, unless a BSL facility with the PBoC exists that we do not know of.

Last week, Prime Minister Narendra Modi announced the linkage of India’s UPI payment network with that of the UAE and an agreement to settle trade in each other’s currencies. The payment system linkage is a great idea, since diaspora flows from the UAE are the backbone of India’s inflows and could easily rise to tens of billions of dollars a year if the process is user-friendly. While the trade link looks like ‘de-dollarization’, one must remember that the UAE dirham has a hard peg to the US dollar.

While these bilateral linkages will on the margin reduce the dollar’s market share both as a reserve currency and as a means of cross-border payments, the American dollar remains the world’s dominant global currency. China’s and India’s strategy to internationalize their currencies with BSLs and bilateral agreements fits in well with their (nearly closed) capital accounts. Without the rupee and yuan being fully convertible, their market share will remain modest in the international context. Far from replacing the dollar, these efforts are likely to provide an ‘alternative payment system.’

Nevertheless, like in contemporary geopolitics, currencies are likely to acquire a ‘multi-polar’ context. Even with multi-polarity, the dollar is likely to remain dominant, still conferring all the advantages (and responsibilities) of a reserve currency on the US. There is no real competitor in sight.

P.S: “Don’t grieve. Anything you lose comes round in another form," said the poet Rumi.

Narayan Ramachandran is chairman, InKlude Labs. Read Narayan’s Mint columns at 

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