Russia’s brutal invasion of Ukraine has sparked revulsion across the globe, as Vladimir Putin’s armies attempt to redraw the map of Europe. In response, governments in North America, Europe and Japan have begun a co-ordinated assault on the Russian economy, critically targeting its most important financial institution, the Russian central bank. Yet even as the immediate impacts are felt by ordinary Russians, this demonstration of economic power is likely to reinforce the relative decline of the dollar-centred West in the emerging global system.
The offensive operation against Russia’s central bank isn’t quite “unprecedented”, as it has been billed. The European Central Bank (ECB), dominant inside the eurozone, used its own powers to withhold support in order to bring to heel the Irish government in 2010 and then, more dramatically, the newly elected Syriza government of Greece in 2015. By threatening to remove emergency liquidity assistance for the country’s failing banking systems, the ECB, as sole supplier of euro reserves, was able to blackmail both governments into imposing austerity on their populations. The ability to attack a country’s banking system is a hugely powerful economic weapon, as the impacts in Russia are making clear, from rapidly rising prices to the anxious queues for bank withdrawals.
With the Bank of Russia unable to sell much of its reserves to purchase roubles in foreign exchange markets – an attempt to push up international demand for the currency in order to stave of the total collapse of its international value – the central bank was forced to jam up interest rates and impose restrictions on capital movements out of the country. Adam Tooze is among those arguing that, for all the talk of “deglobalisation” and the ending of a dollar-centred global financial system, the mighty greenback still holds sway. Noting that the dollar has appreciated rapidly in value on the back of the global uncertainty caused by Russian aggression, and that there are no signs of financial market tremors of the sort we saw in the early days of the Covid-19 pandemic, Tooze has suggested that the US Federal Reserve has a “well-justified reputation as the generous hegemon of the dollar-based system”.
He’s half-right. Within the dollar-centred financial system, in the years since 2008 the Federal Reserve — and therefore the US government — has consolidated its position. But increasingly, as the Ukraine conflict shows, countries are slipping outside of that system.
It was in the depths of the 2008 financial crisis that the Fed’s power was consolidated. As global markets seized up late that year, major banks found themselves facing demands for dollars to meet their liabilities at exactly the moment that they could no longer access dollars from the market. With central banks like the Bank of England or the Bank of Japan unable to create dollars on demand, the Fed opened dollar “swaplines” to a select group of major central banks, a financial arrangement that gave recipients a lifeline of cheap dollar financing that acted as a second, international bank bailout.
The Fed therefore found itself with immense power — the power to cut that lifeline. By October 2013, with the agreement that these lines of support would be left in place permanently, the dollar-centred system looked more closely integrated than ever. But, as a close analysis of the Federal Reserve Board’s own minutes shows, when the Fed was approached by emerging market economies for dollar assistance in late 2008, political and strategic considerations determined who did and who did not ultimately obtain a swapline. Brazil was granted one. India, a similar-sized major developing economy, with a similar volume of trade with the US, was not. India was not viewed “as a strong ally in support of the status quo” and the Fed was more inclined to “subject Indians to the ‘stigma’” of an IMF bailout.
It is exactly this political and strategic construction of the network of dollar support that is now helping to weaken the dollar globally. In place of the promise of neoliberal globalisation — of a rules-based order in which all countries wishing to trade would do so on a level playing field — the new dollar support network is more obviously directed by US interests. Of course, the promise of neoliberal globalisation was never fully realised in practice, as protesters outside and developing countries’ negotiators inside successive World Trade Organisation meetings knew full well. Hidden subsidies and unequal terms of trade still defined the global system, to the benefit of major economies, led by the US.
The construction of permanent dollar swaplines for favoured countries institutionalised these inequalities at the centre of the dollar-centred financial system. A country with ambitions to expand its trading and financial relationships with the rest of the world, without being subordianted to the US, had a strong incentive to develop its own swaplines in parallel. China’s renminbi swapline arrangements have grown from its first six, signed in 2009, to 31 just before the pandemic, worth $500bn. Evidence suggests that the presence of China’s swaplines is directly related to increased renminbi trade. Argentina was the first country to draw on a renminbi swapline, in 2015, while Mongolia drew on the swapline the following year.
Collectively, these swapline networks now form the backbone of an emerging, increasingly regionalised financial system. Swapline arrangements are globally worth $1.9trn, and other “regional financing arrangements” $1.4trn. Both vastly exceed the IMF’s $1trn available for use in a financial emergency.
And while international flows of dollar-denominated finance have never recovered to their pre-crash levels, financial flows in Asia’s emerging market economies, driven primarily by China’s continuing growth, are more than double their previous size. The balance of flows still leans towards the dollar-centred advanced economies but the direction of travel is obvious. The post-crash dollar-centred financial system may be (in the words of the IMF) “more risk-sensitive” and “rational” than before, but additional stability has come at a price. The dollar’s grip may have tightened since 2008, but its effective reach is much reduced.
Within the dollar system the mere threat of swapline removal by the Fed is likely to be enough to provoke a financial market panic and force a government back into line. Outside of that dollar sphere, the power of the Fed is diminished. Operations beyond the dollar core of the system will depend on the more aggressive use of sanctions and other means of economic warfare, increasingly including cyberattacks. These aren’t the birth-pangs of a relatively stable new financial and monetary order, as the economist Zoltan Pozsar has suggested. The dollar’s global hegemony is fading, but in the place of mutually beneficial financial and global trading arrangements, regional currency blocs are forming, each guarded by a jealous and suspicious hegemon: the dollar, the euro and the renminbi. As each hegemon jostles for position in a crowded world, conflicts between them are all but guaranteed.
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