Larry Fink, the BlackRock CEO who manages $10 trillion in assets, believes this is the end of globalization. In his 2022 letter to shareholders, Fink wrote that Russia’s invasion of Ukraine upended the world order, sending the globe back 30 years and exacerbating “the polarization and extremist behavior we are seeing across society today.” Oaktree Capital Management founder Howard Marks echoed these sentiments, spotlighting a “pendulum” shift back toward local sourcing and the further creation and adoption of digital currencies. But is this the end of globalization, or is this a world no longer dominated by the United States? Let the economic chaos begin!
Dumping the Dollar
When the US and its allies imposed tough financial sanctions on Russia, it might have triggered a series of unintended consequences for the West and, in particular, the US dollar. Experts warn these threats could be amplified should Russia be successful in skirting these penalties and survive and perhaps thrive in the aftermath of its war with Kyiv. The de-dollarization campaign kicked into overdrive this month when multiple countries have ostensibly attempted to maintain their economic relationships with Russia or take advantage of America’s current weakness with President Joe Biden at the helm.
The dollar’s status as the chief international reserve currency has been gradually eroding for the last 20 years, the International Monetary Fund (IMF) stated in a new paper, titled “The Stealth Erosion of Dollar Dominance: Active Diversifiers and the Rise of Nontraditional Reserve Currencies.” Reserve managers have been steadily waving goodbye to the dollar in favor of traditional and unconventional currencies, such as the Chinese yuan, the Singapore dollar, and the Korean won.
“A characterization of the evolution of the international reserve system in the last 20 years is thus as gradual movement away from the dollar, a recent if still modest rise in the role of the renminbi, and changes in market liquidity, relative returns and reserve management enhancing the attractions of nontraditional reserve currencies,” the co-authors wrote. “These observations provide hints of how the international system may evolve going forward.”
Speaking in an interview with Foreign Policy, an IMF official warned that nations would need to trim their dollar and even euro holdings in response to sanctions against Russia, adding that the institution is already witnessing an “increasing fragmentation” in the global payments ecosystem.
“We are likely to see some countries reconsidering how much they hold of certain currencies in their reserves,” Gita Gopinath, the IMF’s first deputy managing director, told the publication.
Is this happening right now?
Extreme Makeover: The Financial System Edition
Mastercard and Visa cut links to Russia, but this move was no big deal to the Kremlin after domestic banks have started turning to China’s UnionPay, a system that is available in 180 countries. Several financial institutions, including Sberbank and Tinkoff, are poised to issue credit cards that are co-branded with Russia’s domestic Mir payments system.
But this is not all. Venezuela is reportedly considering joining the Mir apparatus. This could allow Caracas to rejoin the international marketplace while also averting US sanctions, should the South American nation’s negotiations with the White House breakdown. With an ocean of crude oil under its feet, and President Nicolas Maduro offloading some of the disastrous socialist policies in the impoverished country, Venezuela could resuscitate its role as a power player.
Russia and Iran have partnered on a global financial messaging system that emulates SWIFT. Tehran could avoid US-led restrictions, abandon talks with Washington, and revive its depressed economy. While Moscow has manufactured the SPFS, another edifice added to the mix would further undermine the original system that was constructed in the 1970s. Over the last couple of years, China has witnessed exceptional growth with CIPS, Beijing’s substitute for SWIFT.
President Vladimir Putin is also demanding that “unfriendly” countries that purchase his nation’s crude oil and natural gas begin settling transactions in rubles. It is unclear if Moscow could immediately revise existing contracts denominated in euros, but financial markets did take this message seriously as the ruble had recorded modest gains against the greenback and euro on the news. It makes sense considering how desperate Europe is for energy.
And then there is India, a country that is engaged in a balancing act between benefiting economically by working with Russia and appeasing Western powers. India’s Ministry of Finance and the Reserve Bank of India (RBI) could reportedly announce a new rupee-ruble trade agreement with the Kremlin by the end of the month. This move could permit Indian exporters to continue shipping goods to Russia and buying its commodities, despite the myriad of sanctions.
“Export to Russia is not much, only in agriculture and pharmacy products. Now that the whole of the West is banning Russia, there will be lot of opportunities for Indian firms to enter Russia,” A Sakthivel, president of the Federation of Indian Export Organisations (FIEO), told CNBC.
Does the World Need America Anymore?
The US used to be the shining beacon of freedom, a land of opportunity, and a nation that believed in sound money. Political scientists can debate if these principles ring true today, but geopolitically, many “rogue” states have become fed up with bowing down to the dollar hegemony and scared to act out of line. The buck remains king today, accounting for most forex reserves, global energy transactions, and commercial exchanges. Investors routinely seek shelter in the dollar when there is upheaval in the financial markets. This is changing incrementally. Does this mean globalization is coming to an end and everyone is going it alone? Unlikely.
Globalization is here to stay. Instead, it will be a second incarnation, a sequel whereby Washington is no longer given a seat at the head of the table and the dollar is not the undisputed heavyweight champion. Globalization 2.0 would likely consist of regional pacts, currency diversification, and states no longer frightened of poking Uncle Sam from his slumber. Be it the global supply chain crisis or the war in eastern Europe, the dismantling of the present-day world order is accelerating. Will China fill America’s vacuum, serving as a de facto superpower successor? Crack open the baiju.
~ Read more from Andrew Moran.