Russia sanctions threaten to chip away at dominance of US dollar, warns IMF

JONATHAN WHEATLEY — LONDON
COLBY SMITH — WASHINGTON

The unprecedented financial sanctions imposed on Russia after its invasion of Ukraine threaten to gradually dilute the dominance of the US dollar and result in a more fragmented international monetary system, a top official at the IMF has warned.

Gita Gopinath, the IMF’s first deputy managing director, said the sweeping measures imposed by western countries following Russia’s invasion, including restrictions on its central bank, could encourage the emergence of small currency blocs based on trade between separate groups of countries.

“The dollar would remain the major global currency even in that landscape but fragmentation at a smaller level is certainly quite possible,” she said in an interview with the Financial Times. “We are already seeing that with some countries renegotiating the currency in which they get paid for trade.”

Russia has sought for years to reduce its dependence on the dollar, a campaign that accelerated in earnest after the US imposed sanctions in retaliation to its annexation of Crimea in 2014.

Despite those efforts, Russia still had roughly a fifth of its foreign reserves in dollar-denominated assets before the invasion, with a notable chunk held overseas in Germany, France, the UK and Japan. Those countries have banded together to isolate Moscow from the global financial system.

Gopinath said greater use of other currencies in global trade would lead to further diversification of central banks’ reserve assets. “Countries tend to accumulate reserves in the currencies with which they trade with the rest of the world, and in which they borrow from the rest of the world, so you might see some slow-moving trends towards other currencies playing a bigger role [in reserve assets],” she said.

The dominance of the dollar — backed by strong and highly credible institutions, deep markets and the fact that it is freely convertible — was unlikely to change in the medium term, she added.

Gopinath noted that the dollar’s share of global reserves had fallen from 70 per cent to 60 per cent over the past 20 years, with the emergence of other currencies led by the Australian dollar.

About a quarter of the decline in the dollar’s share can be accounted for by greater use of the renminbi. But less than 3 per cent of global central bank reserves are denominated in China’s currency, IMF data show.