The Ukraine war and after: Is dollar losing heft as reserve currency?


Unlike most unilateral sanctions by the US and its Western allies, the current one on Russia, deriving from the Ukraine war, has raised questions about the continued feasibility of the American dollar as the world’s ‘reserve currency’. Nations like India, China and Iran have begun doing rouble-centric business with Russia, though based on their respective home currencies.

Just now, New Delhi has confined itself to crude-imports at discounted prices that Moscow offered a day or two after the commencement of the Ukraine war. The question remains if price-cut was a part of Russia’s strategy to pooh-pooh impending sanctions, or was in as simplistic a fall-out of the sanctions, as the West wanted the world to believe. Whatever that be, the consequent rupee-rouble trade and the like involving countries like China and Iran have questioned the unchallenged place the American greenback has had under the Brenton Woods arrangement since the end of World War II.

This is not the first time post-Cold War Russia is facing Western sanctions. But this is the first time that the world has reacted as instantly as the sanctions came. Unlike this time, over the US sanctions on Iran and later Russia, separately, India negotiated with the US, in bits and pieces, paces and phases, to find alternate ways — but with Washington half-heartedly acquiescing to New Delhi’s pronounced predicament. This time, the minute the first shot was fired and the first sanctions came, Moscow announced crude price-cuts, and the Indian decision went pronto. Ditto with other nations that had to defy the ban, whether for economic or political reasons, or both.

Secular platform

But there is a difference between the past and the present sanctions. Unlike in the past, the West unwittingly banned Russia from the SWIFT interbank communication platform, which was believed to be secular and above partisan politics of the global and regional kinds. Even nations that were not doing any direct business with Russia and Russian were affected, indirectly. They had not bargained for the same.

At more personal levels, nations like Sri Lanka and the Maldives, which began receiving Russian tourists in big numbers after the long pandemic lockdowns, because Russian tourists in their midst could not pay up — as the credit cards and ATM cards were not worth the laminated piece on which they were printed, leaving aside whatever substantial amounts that they had represented at an overseas vendor until the previous day.

Nations going beyond those with war-intent that the US-led West does not like — say, like Russia this time — are bound to squirm in their seats though as individual sovereigns they may not have the fiscal, forex and economic muscle, they may not be able to do much. But collectively they can do at least some thing, look around for alternative SWIFT-like mechanisms, backed by sovereign guarantees. China may be an immediate candidate wanting to capitalise on the impossibility of small nations’ situations. India may not be a candidate, but it certainly is a victim.

India does not figure in the West’s sanctions list thus far, or so it seems, unless someone in a Western capital wants to make an ‘example’ on the human rights front, pertaining to Kashmir and the North-East, sometime during the run-up to a major election nearer home. They have already hauled up India before the UNHRC, more than once. The US, citing domestic laws and practices, as is the wont, too has been naming India on this score through successive years. Yet, Washington wants India to support such unilateralism vis-a-vis the Ukraine war.

Not the first time

External Affairs Minister S Jaishankar has since informed Parliament that the government would (have to?) consider reviving direct rupee-rouble trade with Russia. This is thus not the first time that India is dealing in rupee-rouble trade. It had done so in the pre-sanctions era, when the post-Cold War Russian economy needed trade more than dollars. By acquiescing to the straight-and-firm position of New Delhi on crude trade with Russia after the Ukraine war, as it had done already over the S-400 missile-shield Indian purchase from Moscow, Washington seems to be acknowledging the impossibility of unilateral sanctions as much as it could.

According to reports, India’s crude trade with Russia constitutes only four per cent of its requirements. It remains to be known if the discount-price imports would push up the figure substantially. Otherwise, the US pressure on India to join the sanctions regime implies two things. One, the American pressure on India is more politics, and less economics. Two and more importantly, by asserting its independence to do business with Russia, India has reiterated its ‘strategic autonomy’, this time on the trade and economic front because that is at the centre of bilateral and multilateral strategic relations this time.

This is not the first time that India has defied the US sanctions. Nor is Russia the first nation over which India has done so. When unilateral American sanctions hit oil imports from Iran earlier, New Delhi began doing direct rupee-rial trade with Teheran through a public sector bank with no business interests in the US. It did not stop there. Neighbouring Sri Lanka too wanted to use the Indian facility to pay Iran for oil supplies.

Both Sri Lanka, and common neighbour Maldives, revived their proposal then also for floating a common South Asian currency. If it did not happen, it was not because of any fear of a third nation, be it the US or anyone else, but because of South Asia’s internal dynamics that has since rendered even SAARC a moribund outfit.

‘Shaky’ position

If anything, the US should have thought about it, tried and built a consensus before moving forward this time, if President Joe Biden thought the ‘shaky’ Indian position from within the Quad and Indo-Pacific are causes for eternal concern. The US has time and again reiterated that Quad is not a military arrangement. But none of the four members, including India, has clarified what else is Quad instead. Likewise, the Indo-Pacific is supposed to be a development vehicle, running parallel to and hopefully overtaking China’s BRI in an indeterminable time.

It is highly doubtful if the charter of either the Quad or the Indo-Pacific, or whatever they have in its place, has provisions for ‘punishing’ other nations, including China, which they target, with economic sanctions of any kind. Economic boycott of any country by one or many countries only involves they are not doing business with the chosen one or those that do business with the ‘barred’ nations. The SWIFT kind of over-reach, which may be as much immoral as it may be illegal, might not have even been thought of by framers of the charters of Quad and Indo-Pacific.

In a broader sense, often applied by the West to other nations on other issues, SWIT ban on Russia especially could tantamount to human rights violations — as it seems to ‘punish’ individuals who had nothing to do with the alleged offence, committed by Russia and Putin. Biden having branded Putin as a ‘war criminal’ already, these ‘innocent victims’ of the war-crime, stuck in distant lands for no fault of theirs, required a caring hand, not dual-punishment that SWIFT and even the ‘sanctions’ have inflicted.

The sooner the world discusses and debates the legitimacy of such unilateral sanctions’ regime, the better it would be for the larger world! Pending which, the increased irreverence to dollar as a reserve currency could begin losing its charm further, what with the rapidly-growing incidence of the West’s sanctions regime. Otherwise, there is the increasing possibility of nations returning to the forgotten global practice of barter trade, which may still be good in bilateral terms, if at all, not for an open and multilateral world!

The writer is Distinguished Fellow and Head-Chennai Initiative, Observer Research Foundation, the multi-disciplinary Indian public-policy think tank, headquartered in New Delhi. Views expressed are personal.

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The Ukraine war and after: Is dollar losing heft as reserve currency?
The Ukraine war and after: Is dollar losing heft as reserve currency?
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