The US dollar is prominent among the (non-human) casualties of the Ukraine conflict. However, the damage to the dollar and, by extension, to the “architecture” of the entire global financial system differs in two crucial ways from that suffered by or inflicted upon the numerous other economic, financial, and commercial victims to date.
First, it is currently invisible. While the damage to the rubble the most evident currency casualty—has been readily apparent and other economic and commercial destruction has been similarly reflected in the prices of commodities and shipping rates, the dollar’s price has not decreased. It is higher relative to the majority of other currencies than it was before the invasion.
Second, in stark contrast to the majority of the war’s damage, it is the American government—not Putin, Russia, or any other foreign power—that has harmed the dollar’s standing internationally.
What is this mysterious self-inflicted injury that cannot be seen? The United States has simply “weaponized” the currency. It employs the dollar as a tool to persuade Russia to desist and/or discipline it for what it has already done.
NATO and the West’s choice to weaponize trade and other economic operations by boycotting and embargoing Russian products, goods, and services and placing severe penalties on Russian entities—companies and specific individuals in the political, military, and business sectors There has been no declaration of war between the United States or NATO as a whole and Russia. In other words, the pertinent comparison must be with the period of the Cold War and not with World War II or any other “hot war.”
Even in this context, the use of trade, commercial, and other sanctions is not novel; in fact, it is quite common. It is debatable whether and to what extent they are efficacious. The Castro brothers, the late Fidel and the retired Raul, would undoubtedly argue that they are counterproductive, but that is not the subject of this article.
The use of trade sanctions as a weapon specifically against Russia has run into two major issues, both of which are related to the noncompliance of other nations with American initiatives. Many countries (China, India, Brazil, Saudi Arabia, etc.) exhibit political noncompliance because they do not wish to comply. Then there is the practical noncompliance of the majority of Europe, which cannot sever their energy ties with Russia despite their desire to do so.
However, the dollar’s weaponization is an entirely distinct ballgame. It entails excluding Russia from the global financial system that the United States created and largely governs, in which the United States dollar is the predominant global reserve currency. The fact that the majority of global trade is conducted in dollars and that all dollar-denominated transactions are cleared through New York is crucial to this dominance.
Never before has the currency been weaponized. During the Cold War, even when the USSR crushed uprisings in East Germany, Hungary, and Czechoslovakia, and even when it invaded a non-Soviet-bloc state like Afghanistan, the response included boycotts (such as the Moscow Olympics) and other measures, but there was no wholesale seizure of USSR-owned financial or real assets. It was possible but unimaginable at the time. Now that it has occurred, however, it is no longer startling. This is due to the fact that the use of American economic and financial dominance as a weapon of foreign and security policy has become so routine as to be considered standard procedure. At least as far back as 9/11 and the “War on Terror,” this has become a regular feature of American policy, used against any individuals (Bin Laden), organizations (ISIS, IRGC), or countries (Venezuela, Iran) that the United States determines it doesn’t like.
Dollar weaponization’s worst effect: For 25 years, developing countries have worked to build up foreign currency reserves to protect against global financial crises. These reserves are mostly US dollars, US Treasury bonds, and the US financial system.
Your reserves, investments, and bank deposits are conditional due to US sanctions on Russia. If you upset Uncle Sam, assist a sanctioned country, or refuse American sanctions, you may lose what you thought was yours.
Breaking trust or introducing uncertainty changes the connection. Safer is better. Thus, you will desire to decrease your exposure to the U.S. currency, government debt, and banking system. You will seek alternatives, such as keeping more of your reserves in real, rather than financial, assets like precious metals, commodity stockpiles, and even Bitcoin, if you consider it “real,” and reducing your dollar trade.