By Jose Miguel Alonso-Trabanco
As a regular conflict, the ongoing Ukraine war is being fought with kinetic weapons and traditional power projection platforms in conventional operational battlefields. However, its span transcends the domain of military statecraft. It goes much further. In fact, this unfolding confrontation must also be understood as a major clash in the rising strategic competition to determine the future architecture of the global financial and monetary system – a dangerous game played for the highest stakes. On this chessboard, currencies, monetary assets and financial vehicles are being weaponized as instruments of coercion, manipulation, disruption, subordination and conquest. Therefore, said arena is one the key dimensions of the Second Cold War, in which the Western bloc of maritime powers ‒ under US leadership ‒ and the Eurasian axis of continental powers ‒ headed by Russia and China ‒ are struggling with each other to advance their corresponding views of what the world order should be like. The realm of money is now at the forefront of the current rivalry between Leviathan and Behemoth.
Far from being autonomous or conditioned purely by economic variables, the field of international monetary matters has always been strongly influenced by the impersonal forces of ‘high politics.’ As multidisciplinary thinkers like Robert Gilpin, Charles Kindleberger, Benjamin Cohen, Robert Sabatino Lopez, Paul Kennedy, Carla Norrlöf, Benn Steil, Gal Luft, Anne Korin, Susan Strange, Juan Zarate and others have noted, this understanding is crucial to explaining trends related to the configuration of global monetary systems, currency internationalization, the rise and fall of dominant reserve currencies, monetary competition, the fluctuation of exchange rates, the denomination of prices for the commercial exchange of strategic commodities, along with the nature of international financial systems, platforms, and nerve centers. The unorthodox ideas formulated by these authors contradict the principles championed by mainstream liberal economics, which hold that economic behaviors are mostly apolitical, and traditional geopolitical views that tend to disregard the overall significance of money and finance in contexts of rivalries over the global balance of power.
Therefore, this analysis embraces the premise that there is a deep overlap between the economic sphere of money, markets, finance, trade, and wealth, and the political sphere of power, control, conflict, and states. In this regard, the monetary universe is a hierarchical, Darwinian, and competitive domain whose behaviors are heavily interwoven with political realities associated with diplomatic alignments, war, consensual agreements, the structure of polarity, hard power, institutional frameworks of multilateral governance, the evolution of global hegemony, security environments, imperial pursuits, asymmetric power dynamics, geopolitical phenomena, and reputational prestige. Far from being merely theoretical, these observations are supported by empirical evidence. For instance, the historical record provides several instructive examples:
- The position held for centuries by the Byzantine solidus as a reserve currency that circulated even in the most distant corners of the known world. As the ‘dollar of the Middle Ages,’ its widespread projection reflected the might, prosperity, and influence of the Eastern Roman Empire.
- The role of silver from the New World as a monetary substance that fueled the global maritime expansion of the Spanish Empire and the unparalleled reach of its transoceanic trade networks.
- The rise of the pound sterling as the world’s leading reserve currency and the ascent of London as the globe’s top financial hub in the era of “Pax Britannica,” after Britain emerged victorious from the Napoleonic Wars.
- The conformation of the Bretton Woods international monetary regime with the US dollar ‒backed by gold ‒ as its cornerstone, as a result of a managed hegemonic transition towards the end of World War Two. In fact, the subsequent American geopolitical, strategic, and military leadership of the Western World in the Cold War cannot be explained without the crucial role played by the transactional agreements derived from Bretton Woods. In this framework, Washington brought much of Western Europe and Japan into its orbit through the offer of access to its consumer markets, the unrestricted ability to engage in international trade (courtesy of the US Navy), a generous supply of credit to reactivate economic vitality, and a stable reserve currency as an international public good.
- The American threat to bring down the pound sterling in order to force the withdrawal of British troops from Egypt in the context of the Suez crisis, as a surgical strategy crafted in order to avoid the disintegration of NATO.
- The creation of the euro as a project of the Franco-German axis designed to hasten the process of European integration.
- The interest in reverting the denomination of Iraqi oil sales from euro to dollar as one of the key drivers behind the 2003 Anglo-American invasion of Iraq.
Moreover, there are also contemporary examples that point in a similar direction. These include the ISIS project to launch a tri-metallic currency system in order to challenge Western money; the accumulation of gold holdings (by states like China, Russia, India and Turkey) because it represents a hard asset with intrinsic value that is beyond the direct control of the West; the growing international projection of the yuan as a sign of Beijing’s growing power, wealth, and influence on a global scale; the reliance of the so-called ‘rogue states’ ‒ Iran, North Korea, and Venezuela ‒ on decentralized cryptocurrencies to mitigate the impact of Washington’s sanctions; and the reluctance of the US Congress to greenlight Facebook’s supranational corporate stablecoin project over concerns related to the preservation of monetary sovereignty and national security.
On the other hand, it is also relevant to understand how natural resources can bolster the strength of a currency. In fact, the value of the US dollar has been tacitly backed by oil since President Richard Nixon unilaterally suspended the gold standard five decades ago. At said turning point, the greenback nominally became a fiat currency in an environment of floating exchange rates determined by market forces. However, in an attempt to prevent its fall, Washington made a deal with the Kingdom of Saudi Arabia, the world’s largest oil producer. The US would provide direct military support against the House of Saud’s internal and external enemies. In return, Riyadh would price its oil exports exclusively in dollars. The dollars earned by the Saudis would have to be invested in either US treasuries or financial products offered by Wall Street, a process known as ‘petrodollar recycling.’ Accordingly, every country that wanted to import oil ‒ a commodity that is essential for pretty much all sectors of modern economies ‒ would have to get dollars in order to pay for it. Otherwise, their energy security could not be guaranteed. To a certain extent, this formula explains the greenback’s enduring supremacy.
Round One: Currencies Under Fire Over Crimea
The Russian ruble has come under fire several times in the post-Cold War era. The first instance took place in the wake of the annexation of the Crimean Peninsula shortly after the Euromaidan movement ‒backed by both Washington and Brussels ‒ managed to overthrow a pro-Russian regime in Kiev and replace it with another staunchly aligned with the West. In early 2014, the US implemented punitive economic and financial sanctions against Russia as a reprisal. Their effect was magnified by force multipliers such as falling oil prices and the downgrading of Russia’s credit ratings.
Although the coercive weaponization of financial vectors ‒ an increasingly common staple of contemporary American economic statecraft, especially when the use of kinetic force is not an option ‒ does not provoke bloodshed, it can still inflict substantial damage, especially against structurally vulnerable economies that are highly reliant on the export of natural resources whose prices are rather volatile, like Russia. Concerning this meaningful precedent, former MI6 spook Alastair Crooke argued that the instrumental use of finance as a strategic spearhead in a strike against a geopolitical rival indicated a growing financialization of conflict. In that episode, the ruble’s exchange rate against the dollar went from around 35 rubles per dollar in February 2014 to 69 a year later (i.e. it lost half of its value) and it never returned to levels close to its original position before the crisis. As a result, the opulence accumulated as a result of nearly a decade of high energy prices rapidly vanished and the ambitious idea of turning Moscow into a world-class financial hub was demolished. Needless to say, the plan to encourage the rise of the ruble as an emerging reserve currency was obliterated as well.
Back then, rather than capitulating, the Russian bear responded with an unorthodox defensive strategy. Specifically, the Eurasian behemoth took advantage of temporarily declining gold prices in order to increase its physical holdings of said precious metal, which is a hard asset with intrinsic value that is beyond the direct control of Western powers. In fact, far from being a “barbaric relic” or a commodity that is stockpiled in vaults merely because of “tradition,” gold is a timeless and universal symbol of power, prestige, wealth, and even beauty, as the late Swiss banker Ferdinand Lips sharply observed. Tellingly, Russian gold reserves became the world’s sixth largest. Likewise, China’s financial assistance was helpful to stabilize the ruble’s value. This fateful event prompted the Russian crusade ‒masterminded by Sergei Glazyev, one of the Kremlin’s leading economic advisers ‒ to instigate a global revolt against the US dollar’s uncontested monetary hegemony. Glazyev even suggested that the Russian state should purchase every single ounce of gold mined in Russian territory in prices denominated in rubles in order to: 1) increase national gold holdings; 2) avoid direct exposure to international financial markets; and 3) bypass transactions involving the circuits organically connected to the dollar, identified as a linchpin of US national power and also a center of gravity that could be targeted one day.
Glazyev’s assessment is not mistaken. The role of the dollar as the globe’s hegemonic currency gives Washington the chance to artificially increase military budgets, sustain prolonged fiscal and trade deficits, monitor international transactions, implement sanctions, block transactions, freeze foreign assets, strengthen the influence of Wall Street heavyweights in global financial markets, manipulate the prices of strategic commodities, and accumulate stratospheric levels of debt with no meaningful consequences. Moreover, even though it is a fiat currency, the greenback is ultimately backed by US military firepower, including things like aircraft carriers, stealth fighters, nuclear weapons, submarines, ICBMs, special operations forces and drones. Accordingly, those who have challenged the dollar have paid a heavy price. Therefore, the dollar is paradoxically a formidable pillar of US national strength, but also an Achilles heel whose downfall would unravel the unipolarity coveted by the US leviathan in the post-Cold War period.
Shortly afterward, the Russians became one of the leading orchestrators of a worldwide campaign to advance de-dollarization. According to some open sources, the Kremlin covertly assisted Venezuela in the development of a sovereign cryptocurrency backed by oil as a vehicle to diminish the impact of sanctions, likely as a small-scale experiment that, even though it turned out to be unsuccessful, taught a valuable lesson: a much higher critical mass would be needed to challenge the greenback. Moreover, Russia has repeatedly urged the BRICS bloc to launch alternative financial platforms and forge both bilateral and multilateral arrangements to settle payments in non-Western currencies. In hindsight, this original clash over Crimea ‒ despite its smaller proportions ‒ foreshadowed some of the most tectonic developing trends that are being witnessed today. Indeed, the first shots of a very unconventional conflict had already been fired.
Ukraine War: An Ominous Rematch
As one of the main Western responses to the 2022 Russian invasion of Ukraine, the assets of the Russian Central Bank held abroad ‒ in places like the US, the UK, the EU and Switzerland ‒ were frozen. The sum of money that was confiscated is equivalent to nearly half of Russia’s total foreign exchange reserves. Perhaps unsurprisingly, Ukraine is reclaiming the delivery of this cash to Kiev as a compensation that would also punish and humiliate Moscow; but it is unclear if this request will be granted by the West, especially because holding Russian money could be leveraged as an incentive to engage in diplomatic negotiations. In contrast, an outright appropriation or direct transfer would be seen as an unequivocally escalatory move. In order to keep things in perspective, it must be borne in mind that as late as January 2022, Russia had the world’s sixth largest forex reserves.
In this respect, although stealing an enemy’s wealth for its own sake is not uncommon in war, this measure was intended to diminish Moscow’s ability to fund its campaign in Ukraine, bring down the ruble’s value, undermine the ability to implement monetary policy, trigger hyperinflation, provoke a credit crunch, prompt the collapse of the Russian banking system, and stimulate the evaporation of savings. Moreover, it was expected that ‒ along with other Western retaliatory actions ‒ this could lead to regime change in Moscow. Although it is unclear if all the desired outcomes will be achieved, the first effects of this heavy blow materialized in a speedy way. When the Russian “special military operation” was launched on February 24, the exchange rate was 81.31 rubles per dollar and, by March 7, one dollar was worth 142.78 rubles (a 43 % depreciation in under a couple of weeks). In the words of President Biden himself, the ruble was being reduced to rubble.
Needless to say, this onslaught has tested Russian preparedness and resilience. Russia first reacted defensively with measures of damage control like the introduction of monetary restrictions and the increase of interest rates in order to prevent the utter collapse of the Russian ruble. Furthermore, in an attempt to bypass Western financial circuits linked with the dollar, Russia is encouraging the growth of alternative financial platforms like the Financial Message Transmission System and the Mir electronic payment system for credit cards. Although both were originally created for domestic purposes, the involvement of foreign trade partners and their interfaced connection with Chinese financial arteries provides a critical lifeline. Likewise, considering that their decentralized governance structure offers counter-hegemonic properties, stateless cryptocurrencies can also offer conduits worth exploring in order to undertake stealth international transactions with partners willing to do business with Russia.
Nevertheless, the most striking development was the Russian threat to halt the flow of natural gas through its network of pipelines to ‘hostile countries’ (i.e. those who have adopted sanctions against Moscow) unless payments are denominated in rubles instead of euros or dollars. The ultimatum ‒ issued by none other than President Vladimir Putin himself ‒ was issued in late March with the purpose of diminishing the impact of sanctions, intimidating European importers of Russian gas with the prospect of massive economic disruption, restoring the value of the ruble, and replenishing Moscow’s coffers. Although the corresponding contracts were originally denominated in euros and dollars, there is little incentive for Russia to employ Western currencies seen as “toxic” because trading in them entails a dangerous degree of exposure to sanctions, confiscations and/or predation. Plus, the Kremlin can afford to formulate such request because, despite heated rhetoric otherwise, Russian energy supplies cannot be easily replaced by European consumers in the near term.
So far, there is no unified European position. Hungary, based on an understanding of statecraft inspired by Machiavellian realpolitik, has expressed its willingness to switch to ruble payments for gas imports if necessary. Other Eastern European nations are sending contradictory signs, which indicates that deliberations are being made in order to assess pros and cons. In turn, non-EU members like Serbia and former Soviet states such as Belarus and Moldova are apparently preparing for an eventual transition towards rubles. In contrast, Germany, France and Poland have voiced their opposition. Although Moscow did not completely back down, it came up with a discreet loophole that represents a face-saving alternative compromise for everyone involved. According to this complex scheme, European buyers of Russian natural gas would have to open accounts from Gazprombank and pay for their imports with euros, which are then internally exchanged for rubles so that the transaction can be finally settled on their behalf. Therefore, the profits made are ultimately being denominated in rubles and, in parallel, Russia can also stockpile foreign hard currencies on Russian soil (instead of being held overseas, where they are within reach of ‘unfriendly’ forces). In other words, Gazprombank is operating as a de facto substitute for Russia’s Central Bank as monetary and financial intermediary. It is unknown if the Russians softened their position or if this arrangement is what they wanted all along. With this sophisticated asymmetric equalizer ‒ a countermeasure likely conceived by Glazyev ‒ Russia has managed to restore the stability of the ruble. By April 6, it had practically returned to the average levels that prevailed before the Ukraine War broke out (79.58 rubles per dollar). One must bear in mind that, as Kindleberger points out, the exchange rate of a currency is not just a number, it is a symbol of the issuer’s hierarchical status in the world. Hence, without a strong currency, the credibility of states that intend to reposition themselves as great powers is substantially diminished. Plus, a stable currency is a psychological factor that encourages domestic confidence and national pride.
A second Russian accomplishment has been to deter European countries from adopting the hardline approach towards Moscow promoted by the US, the UK, and Poland. Implicitly, this deal demonstrates that Europe has no choice but to rely on Russian energy whether it likes it or not, at least for the time being, and that European nations are reluctant to sacrifice their economic prosperity and to antagonize Russia merely to protect Ukraine, please the Americans, or uphold abstract values. It has also sowed confusion and exposed that the cohesiveness of the EU should not be taken for granted. In addition, the threat to embargo all supplies of Russian fossil fuels ‒ pushed by overzealous neoconservative ideologues‒ has been neutralized. Such an option is not conceivable under the circumstances. It would elicit a strong backlash from Moscow, leading to even higher tensions. Furthermore, since it has the potential to bring a massive economic downturn for Europe as a whole, this reckless measure would be economically and politically suicidal. In order to fathom how dangerous such scenario could be, it is important to remember that hyperinflation and currency depreciation during the Weimar era were major circumstantial factors that the Nazis took advantage of to energize their rise to power.
Moreover, Moscow now has the market power needed to shape the euro-ruble bilateral exchange rate in accordance with its interests. The larger significance of this development must not be overlooked. With this counterintuitive masterstroke, the Russian ruble is now tacitly a currency backed by a hard asset with intrinsic value and whose continuous demand is steady in international markets. Furthermore, natural gas is not just an ordinary commodity that can bring wealth to those who sell it. Above all, it is essential for the energy security of European consumer markets. Accordingly, the value of the Russian ruble has been pegged to energy in a way under Moscow’s control. Another remarkable issue is the Kremlin’s warning that the alchemical gas-ruble financial association is merely a ‘prototype.’ The endgame, according to the statements made by official spokesmen, is to eventually carry out the exports of other Russian natural resources through transactions involving the ruble as well. Hypothetically, that gradual process could include various commodities such as metallic minerals, oil, neon, uranium, gemstones, cereals, and timber. Yet, it is unclear if this is purely a bluff or a real threat that seeks to bury the remnants of Bretton Woods. In an ironic twist of fate, the White House is accusing Russia of engaging in artificial currency manipulation; but it also admitted that, despite Washington’s outspoken opposition, the decisions of European countries about payments in rubles are being made individually.
Moreover, harnessing the condition by the Russian Federation as one of the world’s leading producers of gold, the Russian Central Bank has established the equivalence of 5,000 rubles in exchange for one gram of gold. Since the official provision contemplates that gold can only be traded for rubles, this means that the Russian currency is now also tied to the aurous metal, the hardest form of money. In the grand scheme of things, Moscow has brought the gold standard back to life, which had been prematurely dismissed by neoclassical economists, dogmatic central bankers, and narrow-minded technocratic policymakers. Hence, the new organic connection of the Russian ruble with energy and gold represents a strategic and paradigmatic challenge for Western fiat currencies, especially considering that the accumulation of unpayable debts and the overuse of quantitative easing motivate reasonable doubts about their sustainability in the long run as effective stores of value. Perhaps the Kremlin lacks the financial firepower that would be needed to sink the dollar singlehandedly, but the echo of the example set by Russia can resonate strongly in the capitals of great powers and regional powers which are at odds with Washington for various reasons. For instance, a few weeks ago, Saudi Arabia ‒ angered by Washington’s conciliatory approach towards Iran under the Biden administration and eager to court the favor of rising Eurasian powers ‒ held talks with China in order to discuss the possibility of pricing its oil exports in yuan. Furthermore, Russia and India are negotiating an agreement that would facilitate the involvement of their own national currencies in bilateral economic exchanges. Such scenarios were unthinkable barely a decade ago. More and even deeper realignments like these could flourish in a foreseeable future.
The greenback is still the globe’s hegemonic reserve currency. According to the International Monetary Fund (IMF), in the last quarter of 2021, claims in US dollars represented 54.78 % of the world’s total foreign exchange reserves, well above other hard currencies such as the euro, the Japanese yen, the pound sterling, the Chinese renminbi, the Canadian dollar, the Australian dollar and the Swiss franc. Moreover, information released by SWIFT about the total volume of payments made during February 2022 reveals that, in terms of value, the dollar is the currency employed in 38.85 % of recorded transactions, followed by the euro (37.79 %), the pound sterling (6.76 %), the Japanese yen (2.71 %) and the yuan (2.23 %). Aside from the sheer economic might of the United States, the dollar’s strength is underpinned by US military might and its undisputed leadership in international financial markets. In comparison, the overall gravitational pull of the Russian ruble and the sheer planetary weight of the Russian economy are limited.
Nevertheless, in an attempt to armor itself with gas and gold, the Russian counterstrike has opened Pandora’s box. Although mostly defensive, the path followed by Moscow might trigger a chain reaction that could overthrow the dollar’s hegemonic position and unravel Western control of the international financial grid. Regardless of whether the Kremlin manages to achieve a strategic victory or not, a powerful wave of “constructive destruction” (a concept that describes the abrupt and chaotic removal of an old order so that a replacement can be born from the ashes of its forerunner) has been unleashed and the resulting snowball will likely keep growing. Tellingly, none other than Goldman Sachs is warning that the weaponization of the dollar against Russia is an incentive that will encourage many countries to move away from the greenback, accelerate diversification, and explore potential alternatives. According to said investment bank, in the coming years the dollar might follow a decline comparable to that of the pound sterling in the early 20th century, even if there is no clear substitute in the horizon. Similarly, the IMF claims that the emergence of a new world order that remakes the global correlation of geopolitical forces could also reshuffle the structure of international payment networks and the nature of reserve holdings. It is unknown if the Biden administration envisaged this collateral fallout as a potential by-product of waging economic war against Russia. Would Washington be willing to open fire in a military confrontation fought to avert the dollar’s eclipse? Will this blowback push the US to embrace a more sober approach? Is it too late for the Americans to reconsider their position so that counterproductive outcomes for their national interests are averted? Would they be willing to reboot the dollar as a hard currency backed by tangible assets?
More than ever before, the domain of money has become a fierce arena of global strategic competition in which currencies, monetary assets and financial vehicles can act as weapons, shields and targets, a puzzling and exceedingly complex reality that needs to be grasped by contemporary statesmen, warriors, and strategists. First, the ruble was under attack but now it looks like it is the dollar’s turn to find itself in the crosshairs. Arguably, currencies are far too important for state-of-the-art battlespaces to be left to the economists, financiers, and central bankers alone. With the direct offensive involvement of money in conflict, a dangerous genie is out of the bottle and there is no way to put it back. Therefore, analysts are assessing if, as a powerful catalyst of structural change, the current period of increasing upheaval can eventually lead to ‘currency multipolarity’ and/or the bifurcation or fragmentation of international finance. It is a matter of time before a reckoning occurs and the clock is ticking. In one way or another, the ultimate fate of the international monetary system will mirror the future configuration of the global order. After all, the trajectories of both have always evolved symbiotically. Both are literally two sides of the same coin.
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