Opinion Sur
After the globalization with American hegemony, we have returned to the old rivalry between powers, as it is illustrated in the cartoon published in Puck magazine in 1901.
The Ukraine war promises to be longer and more disastrous than what everybody expected. I abstain from adding my own opinions to the jumble of true and fake news, the daily comments of those who follow the events, and the biased arguments from either side of the conflict. In such context, the distance and wait seem prudent.
For a purely military analysis, from a Western view, I can suggest the talk given by an admiral—former NATO supreme chief and member of my own nautical club—that I consider quite objective and precise[1]. Like the speaker, I can project the most probable result, that is: Ukraine division and after many combats with innumerable victims (mostly civilian), the signing of a “peace,” or better said an armistice that would leave everybody unsatisfied: Russians, Ukrainians, Americans and Europeans[2]. Each of the belligerent would declare an alleged “victory” that will be only partial and Pyrrhic and enter into a stalemate period. What type of stalemate? That of another future war, while participants heal their wounds, bury their dead, and try to partially rebuild a destroyed country[3].
In such hopeless standby, I dare to outline some medium-term geopolitical consequences, following an interpretation threat that allows for seeing what is behind the din of daily life. The interpretative threat that I propose follows a wise popular saying in United States—a commercial country par excellence —used when we are faced with a mysterious or grubby issue: Follow the money. By following the money’s thread and because of the sanctions applied in the Western world, particularly in the United States, we arrive effortlessly to the biggest sanction, which is much more severe than all the rest applied until now and whose seriousness surprised power managers from everywhere—even bankers and financiers within United States. It is no more and no less than blocking Russia’s Central Bank reserves. It is indeed a seizure. The American government was able to do it expeditiously as many of the captured Russian funds, as those of most countries, were in dollars. In its actual declining phase as superpower, USA counts on a devastating weapon, more silent but as overwhelming as a nuclear weapon.
When I lived in France, the current president of the Republic, Valery Giscard d’Estaing (a liberal from the center-right), when referring to the world use of the dollar as the only strong reserve currency, coined a phrase that became famous: “It is an exorbitant privilege.” Then the privilege was not only exorbitant but also unmovable. It was the touchstone of the international order, designed and directed by United States since the Bretton Woods accords, where the International Monetary Fund and the World Bank appeared. Those who could not use the dollar were incapacitated for participating in world trade, take loans, receive investments, etc. The American dollar was the fundamental lubricant of the system and could also be used as disciplinary measure when its use or accumulation was forbidden, measured generally applied to smaller countries. It was at the same time an indispensable exchange means and a dissuasive weapon in the western world.
At this point, it should be advisable to clarify that the power of a dissuasive weapon resides in its intimidation capacity, that is, as a threat. Its repetitive or total use as a weapon for aggression (particularly towards a larger power) is capable of producing great chaos.
According to the Financial Times, the reserves in foreign currency of main countries, in order of importance, are as follows:
- China
- Japan
- Switzerland
- India
- Taiwan
- Hong Kong
- Russia[4]
- South Korea
- Saudi Arabia
- Singapore
- European Union
- USA
The fear of possible similar sanctions to those applied today against Russia, will make other countries try to protect their reserves outside of the dollar zone, what eventually will lead to other currencies—yuan, euro, and crypto currencies—to step forward as alternatives to US disciplinary order. It will not happen in the near future, but yes, it will be sketched as Bretton Wood order fragments in large rival blocks, with China leading the way.
Today, the power of sanctions against Russia is based on the dominance of the American dollar, which is the preferred currency in international trade, in financial transactions, and in central banks reserves. However, by militarizing the dollar as it has been done in the last months, United States and its allies risk provoking a geopolitical blowback that can lessen their own influence and could break the global financial system into rival blocks. Such rupture would leave everybody in the losing end.
Large wars tend to erode the dominance of some currencies and announce a fundamental change in the international financial system. The militarization of finance accelerates Chinas plans, which does not hide its desires for using its own currency as center of an alternative system. Beijing considers that the dollar is the flip side of the American dominance of the seas: a weapon as strong as its powerful navy. Chinese leaders have reached the conclusion that by breaking the own rules of the game with Russia, the Americans have changed the rules for everybody. By passing from deterrence to open financial aggression, they are changing the worlds finances forever.
[1] . For those interested, I can email the recording, please write to juancorradi@gmail.com
[2] . It is worth asking oneself, if such “Finlandization” of Ukraine could not have been achieved without such bloodshed, with the Minsk agreements that were torpedoed from several parts. The future “Finlandization” will be more painful. On the other hand, the fear of a possible “Ukrainization” will make Finland join NATO.
[3] . The situation is not new. Let us remember the Versailles Treaty, which sealed the end of WWI, but simply prepared the terrain for the Second.
[4] . According to Russia’s Central Bank, one fourth of its international reserves are in France, Germany, and Austria. The total of deposits in Euros is around 32%, the largest proportion compared to any other denomination. Although the report does not specify the location of 10% of the reserves, it does indicate that 5% is in the hands of international financial institutions such as the International Monetary Fund and the Bank for International Settlements. European Union countries, together with United Kingdom, United States, and Canada, were mobilized to freeze the assets under their jurisdiction that belonged to Russia’s Bank and Russian citizens. In addition, Switzerland joined, whose government announces the adoption of the same package of restrictions than its neighbors of EU and Japan, who also decided to freeze funds from some Russian banks—including the central bank—and restrict exports from that country. All that, because of pressure from the US. We are not sure how long this hegemony will last.
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