The situation arising in the global economy due to large-scale anti-Russian sanctions may accelerate the search for and development of an alternative to the international payments infrastructure that has been in existence for many years and is dominated by the U.S. dollar, says Jerome Powell, head of the U.S. Federal Reserve System.
Powell addressed his concerns at the meeting of the Senate Banking Committee, where he was invited to help the U.S. senators to figure out how China might view the US-led efforts to isolate the Russian economy. The U.S. has used a U.S. dollar related transaction ban on Russian payments and limited Russia’s ability to use U.S. dollars.
Senator Jack Reed, one of America’s leading fighters against rising Chinese power and head of the Armed Services Committee, told Powell at the hearing that Beijing is now afraid to be in Russia’s place too and that it will try to avoid it.
Asked by Reid if he shared his view, Jerome Powell said that China had been working on reserve currencies for some time and was developing its own messaging system for financial transactions, apparently to replace SWIFT. The United States and Europe have disconnected several Russian banks from the system, which is very important for payments in dollars.
“This has been going on for some time,” Powell told the senators, adding, “but now the situation may develop along a different trajectory.”
By sharply limiting Russia’s use of the dollar, Washington and Brussels are pushing not only Russia but also China to leave the dollar zone, which really does not want to be in Moscow’s place, for example, because of an attempt to resolve the Taiwan issue by military means or its policy towards Xinjiang, Uyghur Autonomous Region of China. Meanwhile, Ukraine, which is at the centre of the current acute geopolitical crisis, is clearly not worth the dominance of the U.S. dollar in the global financial system.
Moscow and Beijing are trying to switch in bilateral trade to national currencies, the ruble and yuan, respectively. PJSC Gazpromneft is the first Russian company to fully convert mutual settlements into yuan for refuelling flights of Russian airlines in China. By the end of this year, it is planned to transfer payments for refuelling aircraft of Chinese airlines at Russian airports into rubles.
So far, the dollar occupies a very important place in Russian-Chinese trade. For the first nine months of 2021, according to the data of the Central Bank of the Russian Federation, 8.7% of trade turnover fell on rubles and 7.1% on other currencies. Dollars and Euros accounted for 36.6% and 47.6% of trade, respectively.
China believes that the West will suffer
Experts at the China Institute of Contemporary International Studies says that Russia will stand up to the sanctions, and the West will suffer. The institute is one of China’s most influential research institutes for international affairs, in addition to being the oldest and largest. In addition to its affiliation with China’s Ministry of State Security, it is involved in shaping China’s foreign policy. The Chinese leadership listens to its opinion.
As per an expert from the institute, Russia as a whole has managed to adapt to life under the sanctions that the West imposed on it for the return of Crimea in 2014. The ban on Russian banks to use the SWIFT money messaging system will cause serious damage to Europe as well. However, Russia’s disconnection from SWIFT will have the biggest negative consequences for the U.S., which will have to provide allies with economic and humanitarian assistance. The influx of millions of refugees from Ukraine can also, according to a Chinese analyst, destabilize the political situation in the world. Furious disputes about the fate of refugees in Europe can weaken its unity at decisive moments.
As per the analyst, West’s chances of success in sanctions may appear only in the event of a strike on Russian energy exports. However, the United States cannot do this in the conditions of a global shortage of energy resources, as well as rising prices caused by inflation unprecedented in recent years. The situation with energy resources is the same in Europe, which also, despite the belligerent rhetoric, cannot, at least now, refuse Russian gas.
These considerations apply not only in the event of an outright rejection of Russian oil, gas and coal but also when it is disconnected from SWIFT. It is because of the need to pay for Russian energy carriers from SWIFT that Russia is turned off not completely but partially.
In addition, financial sanctions without military support are unlikely to work. Neither Washington nor Brussels can and do not want to enter into a military confrontation with Moscow.
An important role in the fate of the sanctions will be played by the fact that the strength of U.S. sanctions is reduced due to the duration of their application. Russia has simply become accustomed to them. The integration of the Russian economy into the global economy is not as great as that of many other countries, and this also reduces the effectiveness of sanctions, just like the de-dollarized financial infrastructure that has existed in Russia since 2015. Suffice it to say that the dollar’s share of record high foreign exchange reserves is now at a record low of just 16%.
The huge costs that the United States will have to bear in the economic war with Russia do not contribute to strengthening the effectiveness of sanctions. They, for example, will have to provide large economic and humanitarian assistance to Europe if Moscow turns off the valve on the gas pipe and to Ukraine.
All this gives Russia grounds to look to the future with healthy optimism. The prospects for the collective West, and above all for the United States and its allies in Central and Eastern Europe, look hazy and gloomy. The analyst believes that after some time, the sanctions will return to their authors and organizers and hit them hard.