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Sanctions placed on Russia after its Feb. 25 invasion of Ukraine will gradually weaken the U.S. dollar dominance and strengthen the adoption of digital currencies, according to a top official at the International Monetary Fund (IMF).
Sanctions have pushed Russia to turn to other currencies such as China’s renminbi. This could lead to a more fragmented international monetary system, according to Gita Gopinath, IMF’s deputy managing director.
“The dollar would remain the major global currency even in that landscape but fragmentation at a smaller level is certainly quite possible,” Gopinath told the Financial Times. “We are already seeing that with some countries renegotiating the currency in which they get paid for trade.”
The West and its allies, including Japan and South Korea, have cut off Russia’s access to the global financial system, causing the value of the ruble and Russian stocks to plummet.
Some observers say crypto can be used to circumvent sanctions, giving Russians access to funds via cryptocurrency.
Rattled by the effect of sanctions on their local currency, the ruble, Russians are turning to U.S. dollar-pegged stablecoin Tether to avoid sanctions imposed by the West. Many businesses and ordinary citizens in Russia are turning to Bitcoin as a hedge against soaring inflation.
The decision to freeze Russia’s $600+ billion cash reserves as sanctions for invading its small western-backed neighbor, Ukraine, could also cause other countries to lose confidence in the reserve-backed currencies, most of which are in U.S. dollars.
While Russia has made efforts to wean itself off dollar dependence by asking countries to pay for its crude oil and other commodities in rubles or other currencies, Russia still holds a fifth of its foreign reserves in dollar-denominated assets. A notable chunk is held in Germany, France, the U.K. and Japan.
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Use of other currencies in global trade would lead to further diversification of the reserve assets held by national central banks, Gopinath said.
“Countries tend to accumulate reserves in the currencies with which they trade with the rest of the world, and in which they borrow from the rest of the world, so you might see some slow-moving trends towards other currencies playing a bigger role,” she said.
About a quarter of the decline in the dollar’s share can be accounted for by greater use of the Chinese renminbi. But less than 3 percent of global central bank reserves are denominated in China’s currency, IMF data show.
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