9 March 2022, NIICE Commentary 7680
Mahek Bhanu Marwaha
The Rise of the USA at the end of the Second World War gave rise to the Dollar Hegemony. It was the year 1944 when for the first time the world currencies were pegged with the Dollar rather than Gold, also called the Bretton Woods Agreement. The Dollar’s Supremacy’s decline has been voraciously discussed in the last decade but it showed no sign of an actual decline even till 2020. Although the Russia-Ukraine Conflict and the USA imposing heavy economical and financial sanctions on Russia, along with Russia’s removal of the SWIFT system can be said as the start of the decline of the Dollar Hegemony.
World Wide Effect of US Sanctions
The decade-long use of US Sanctions to impose the American Foreign Policy objectives disturbs 10 percent of World Trade. Apart from that, USA’s unilateral stances and power projection tactics like the USA abandoning the Joint Comprehensive Plan of Action (JCPOA) deal proved to be a wake-up call for EU leaders to look out for their own interests. The formation of INSTEX (Instrument in Support of Trade Exchanges) an SPV (Special Purpose Vehicle) was formed keeping in mind the main objective of deferring the US Swift Sanctions which facilitates non-USD transactions. This trading mechanism saw its first transaction to Iran under Humanitarian Assistance in the wake of COVID-19. Russia’s creation of Mir, which is its own Financial messaging system an alternative to SWIFT, along with China’s creation and full adoption of Sovereign Digital Currency in January 2021 are both such institutes capable of fully distorting and creating a new way of International Trade by diluting the importance and effect of USA’s sanction. The creation of such institutes combined with an increase in the use of Euros as a preferred currency between Russia and Europe and Russia and China is proving to be a prelude to the new economic model dominated by some major national currencies and extensive use of Sovereign Digital Currencies (SDC) which is in the interest of the major players of the world to create a more balanced but a competitive market for other digital currencies.
Can US Sanctions deter the Russian invasion of Ukraine?
The 2014 Annexation of Crimea by Russia saw the USA using economic sanctions as its “Brahmastra” on Russia hoping for a Russian Economic Breakdown. The USA got what it wanted. The Russian economy went through a recession in 2015 and 2016, but the economic breakdown was a mixture of the 2010 oil glut and the economic sanctions. Russia saw a loss of USD 400 billion through 2010’s oil crisis and an estimated USD 170 billion through financial sanctions. But sanctions don’t just work unilaterally. It has an effect on both the ends of the stick. Where Russia saw negative growth in the economy, Europe saw a loss of €100 billion (as of 2015). The sanctions proved to be detrimental to the EU which made the majority of EU leaders oppose US sanctions.
With Russia’s invasion of Ukraine, sanctions on Russia might not prove to be an effective tool for it to sit across the negotiating table considering a data review from World Bank which states that Russia’s dependence on trade decreased making it immune to USA’s sanction. As the EU decides to put stringent Economic Sanctions on Russia to protect its democratic interests and individual players and government officials who have stopped trading with Russia, Russia which is already alienated now will seek solace with China. China is bound to become Russia’s major destination for exports and imports. The symbolic Xi-Putin meet-up alongside the Winter Olympics and the issuing of the Joint Statement on the international World Order entering a new era under the Sino-Russian axis dilutes the importance of the Swift Sanctions. With China condemning the Western sanctions and abstaining in the UN to not choose a side is a clear indication that China doesn’t want to go against Russia and also to maintain its image in the world market as it is so economically tied up to the world it cannot aside in favor of the Western World and thereby treading the thread diplomatically and calculatively.
Blockchain Technology and AI a Catalyst to Digital Currency Infrastructures.
With rising proximities between Russia and China and with China showing the way forward in the Digital Currency arena mixed with its rising prowess in Technology and Research and Development, the future for a new way of the international transaction system is in fact nearer than ever. This is also because of the fact that the Digital Way of currency transaction has become a preferred way because of its convenience. The DCEP (Digital Currency Economic Payment) does not require the internet for transactions and payments can be done as simply as tapping two phones together. Also, it doesn’t make use of the SWIFT system which is a win-win for many countries including Russia, China, Iran, and even the EU considering the dire energy security crisis it faces.
According to a former CSO (Chief Software Officer) of USAF (United States Air Force), the USA has already lost its war on AI to China. China’s AI boom facilitates and speeds up the nationwide adoption of its SDC and China exporting this technology to its Allies, especially now more than ever as Russia gets alienated by the Western Hemisphere over Ukraine Invasion through Sanctions, the SDC could now prove to be the New Economic Reality of the World.
What does this mean to the World?
A combined effect of COVID-19 on the economy of the world and the ban on Russia, by US and European Countries from SWIFT and other financial institutions, has triggered the world economy to be on a roller coaster ride because of such complex co-dependency of economies thereby creating a domino effect. This instability could very well be a start to the multi-polarity in the economic world. There have been talks for a multi-polar world in the realm of geopolitics for over two decades now, but the volatility of the economies could mean the adoption of national currencies, and the best and the most effective way is the Digital Currency Infrastructure. The major players in the East that is Russia’s Mir (SPFS), China’s DCEP, and Cross Border Inter-Bank Payment System, India’s SFMS (Structured Financial Messaging System) are not only potential rivals of the current world monetary system but can replace it by establishing a more competitive world economic system where all the major and rising powers get to pick their share of the pie. Comparing this to the present one it will be in favor of the leaders of the countries to sustain the upcoming economic order to be a multi-polar order rather than one major contender being at the top.
Mahek Bhanu Marwaha is Research Intern at NIICE.
