The headlines focus on the military actions of the war in Ukraine. Everything is seen in terms of stubborn resistance, horrific devastation, and military supplies flooding over the border to frustrate Russia's ambition to take over Ukraine.
However, another fight rages in the background that could have more impact on the world stage. It is an economic battlefield, and the world financial order is at stake.
But even on this monetary front, the West seems to have scored victories. The sanctions packages cut off Russia from the globalized world. Multinational companies are fleeing together with their investment funds. The Russian economy is feeling the pain of inflation and shortages.
By the end of March, President Biden boasted on Twitter that with the “unprecedented sanctions,” “the ruble was almost immediately reduced to rubble.”
An Event Involving the Dollar’s Future
The sanctions did not have this desired effect. The Russian economy has not crashed. The ruble initially lost 25 percent of its value but has since regained it. The Russian monetary unit is tied to oil and gas prices which the war has sent spiraling upward. Thus, the world keeps pumping more hard cash into Russia by buying its oil, while the sanctions keep money from flowing out.
However, one important engagement in the economic war needs to be highlighted since it involves the future of the dollar — the stable unit of exchange that serves as the world’s reserve currency.
The event was the freezing of Russian foreign exchange reserves. On Feb. 26, 2022, a joint statement of the United States, Canada, the United Kingdom, France, Germany, Italy, and the European Commission announced that the parties would freeze the foreign currency assets of the Central Bank of Russia deposited in their respective coffers. About $300 billion of Russia’s war chest was rendered useless just when it was most needed.
Before the announcement, the dollar had many problems yet reigned supreme. No other unit can come close to challenging the volume of dollar transactions. No other nation has the stability and strength to maintain a reserve currency, despite attempts by countries like China.
However, the asset freeze opens up a vulnerable flank and could change how people think about the dollar.
Weaponizing the Dollar
The dollar’s strength lies not in the volume of transactions but the trust that it will be honored as a stable store of value at any time and place. If that trust is broken, nations and industries will no longer see it as a secure haven to park their reserves.
Thus, the asset freeze undermined the dollar at its most vulnerable point: trust. The freezing of dollar reserves of Russia’s Central Bank sends a message to the world that the dollar is no longer secure.
America and its allies had hoped that the shocking loss of access to reserves would be a quick jolt to force the Russians to call back their invasion of Ukraine. Instead, it is causing a crisis of confidence that, once broken, is hard to reestablish.
American political leaders weaponized the dollar. Nothing like this has ever been done on such a scale. Dollar assets can now disappear at any time and for any reason. The other Western monies, while not reserve currencies, also face similar crises of confidence.
“In freezing Russia’s foreign reserves,” writes Philip Pilkington in American Affairs, “the United States, the United Kingdom, and the European Union signaled to the world that other countries' access to their reserve holdings in dollars, pounds and euros is contingent on their approach to foreign policy."
Spreading Distrust of the Dollar Everywhere
The weaponization of the dollar comes at a time when the global economy is splitting into two blocs. One is led by China and Russia, and the other by the United States and Europe. The Ukrainian war and Western sanctions served as a pretext to accelerate a dramatic decoupling process. However, the asset freeze extends this separation worldwide to other nations like India, South Africa, and Brazil, who will now look with suspicion at a dollar tied to foreign policy. Other trade blocks might also form as a multipolar world develops.
The dollar will not face an immediate abandonment. Indeed, the Chinese yuan or other alternatives are hardly trustworthy. However, the move will debase the dollar, spook nations into diversifying their assets, and fragment the global monetary system.
Before the Ukraine crisis, the global economy made everything inextricably interlinked. Products flowed seamlessly from one part of the globe to another. As the reserve currency into which most commodities are denominated, the dollar served as a lubricant that kept things moving smoothly through the system while providing America with cheap goods, abundant credit, and trade benefits.
This solid global union is now shattered by war and mistrust. Rough times are ahead.
Balkanizing the Reserve Currency Role
Under these circumstances, the unthinkable becomes possible. And things can happen quickly when least expected.
Dethroning the dollar, for example, does not mean the world will adopt another global reserve currency. In a decoupled world, the idea is not to replace the present system but to transcend it with a hodge-podge of systems where Russian gas is sold for rubles and Saudi oil for yuan.
It can lead to what Bank of America strategist Michael Hartnett calls the “balkanization of global financial systems” that would distribute the role of reserve currency to several currencies simultaneously.
None of them will have the power and efficiency of the dollar displayed over its eighty-year reign. However, it does not matter in a multipolar economy. Thus, the weaponized dollar could spell the end of globalization. It ushers in a world where all trade will be, to some extent, weaponized according to spheres of influence.
Impact of This Change
No one knows what will happen in this post-dollar, multipolar world. No models exist to make forecasts. The scenario was not even on the radar.
However, it is safe to assume that it will have a big impact on America. All the advantages of a reserve currency status will be erased. The shift will raise domestic prices, erode living standards, increase debt and its service, and make imported goods much more expensive. The rest of the world will experience similar effects.
Much more important than the economic consequences are the cultural ones. The weaponized dollar contributes to the end of the liberal order born of the Enlightenment. Both East and West are in a state of moral decadence and products of this liberal order. Both can no longer endure the surviving moral restrictions of old liberal structures that hinder the way for yet further decay.
Ending Western Hegemony
Hence, the East wants to end Western hegemony by force, while the West pursues a “woke” denial of its dominance. Both strategies require the destruction of the world monetary order established at Breton Woods after the Second World War.
The goal of this new situation is not integration but disintegration.
Vladimir Putin’s stated goal is to replace the present unipolar globalized world with a chaotic “multipolar system” where each power is free to conquer and rules its own sphere of influence without cumbersome restrictions or the rule of law. Such a system will especially benefit China, which can wait on the sidelines of any conflict to pick up the pieces.
On the part of the liberal establishment, it frames the debate in terms of the false narrative of liberal democracy against authoritarian autocracy. Its version of liberal democracy represents the most radical manifestations of a woke, LGBTQ+, secular society that leads to division and self-destruction.
The fall of the dollar is one way to facilitate this disintegration process. For Mr. Putin, if his little war in Ukraine can help achieve this purpose, he will have considered it well worth his while, even if it means sacrificing rubles to reduce Ukraine to rubble.
The one thing both East and West avoid at all cost is a moral conversion which is where the true solutions lie.
John Horvat II is a scholar, researcher, educator, international speaker, and author of the book "Return to Order: From a Frenzied Economy to an Organic Christian Society--Where We've Been, How We Got Here, and Where We Need to Go." He lives in Spring Grove, Pennsylvania, where he is the vice president of the American Society for the Defense of Tradition, Family and Property.