When money, not guns, is the weapon of choice
After a relative calm since the Second World War, we are facing a situation in Ukraine which may degenerate into a catastrophic nuclear conflict. But it’s not just the hard power of hypersonic missiles and nuclear warheads that can be used to achieve victories. Today we have far less lethal, but no less stealthy or tactically inferior weapons – these are the monetary instruments to sink economies by progressive suffocation and disable the financial capability of opponents.
The use of money for good and evil has a long history, dating back to Byzantine solid – the dollar of the Middle Ages – which projected the power of the Eastern Roman Empire. Monetary power gradually shifted to Spanish silver and later to the British pound sterling as the world‘s most valued reserve currency.
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President Richard Nixon’s decoupling from the gold standard more than five decades ago ushered in a new era of US financial dominance. The gold standard was replaced by the dollar as the fiat currency, and all oil transactions were denominated in dollars.
The emergence of the mighty dollar was supported by gold and the post-World War II hegemonic transition that accompanied the rise of American geopolitical and military leadership of the Western world. The generous US$15 billion credit to war-torn European countries for reconstruction under the Marshall Plan of 1948 helped in this process.
Today, the dollar has unparalleled supremacy. Almost all imports and exports are denominated in dollars. In addition, billions of dollars are traded globally in the form of small private transactions, such as overseas travel and the repatriation of the savings of millions of overseas workers. International transactions between companies, countries to settle contracts, repay loans – all of this requires dollars. Countries must maintain enough dollar reserves to pay for their import needs for at least six months or face the risk of default, poor credit and bankruptcy.
Globally, $12-13 trillion is held in reserve, much of which is held by the United States Federal Reserve System. These reserves work to the advantage of the United States, which can (and does) run large budget deficits and take out domestic borrowings several times its GDP without worrying too much about bankruptcy.
The dominance of the dollar and the hegemonic power behind it have emerged as a sore point in the growing strategic competition to determine the global financial architecture.
Jose Miguel Alonso-Trabanco, an international relations professional, notes: “In this game of determining an appropriate financial architecture, monetary assets, control of resources are transformed into instruments of coercion, manipulation, disruption, subordination and conquest. The realm of money is now at the forefront of rivalry for dominance.” The United States can and often does militarize the dollar to sustain and extend its dominance. Such sanctions may be tolerated to some degree, but beyond that, they can turn against them with powerful and destructive measures.
Unlike the hard power of missiles and war machines, financial power can be used for both construction and destruction, from building alliances to gradually weakening the economic power of countries. It can be used for clientelism or denial, to gradually break the energy of the “underprivileged”. Financial power, combined with another deadly weapon, “food diplomacy”, can wreak havoc in the countries that are the recipients of it.
Nations large and small can be pressured by it in different ways. For example, Bangladesh, during its immediate post-liberation period, was subject to sanctions for selling jute to Cuba, leading to the death of thousands of people by starvation due to the refusal of food deliveries.
In the context of the current conflict between Russia and Ukraine, the sanctions imposed by the United States and the West have focused on key elements of financial transactions, stifling the Russian economy of the freedom to exchange goods. and services.
What impact should these sanctions have on the Russian economy? It is difficult to assess at this stage. Russia, with approximately $630 billion in foreign exchange and gold reserves, was in a comfortable situation in the pre-war period. The impacts of sanctions would be negative; Some observe that in February-May 2022, industrial production fell by almost 70%, imports fell by 50% and the debt portfolio increased to $300-400 billion.
The Russians have retaliated to stay afloat by qualifying exports and imports in ruble terms, adopting a quasi-barter system among its allies or with countries dependent on Russia for its oil and gas. But the ruble strengthened and Russia had to take measures to weaken the ruble for fear of negative effects on exports.
So far, Russia is not doing so badly. But how long he can sustain persistent pressure from the United States and its Western allies remains to be seen. It could be a tight call for a showdown.
The key to this lies in the hands of China, another powerful economy with vast financial and trade reach as well as hard power. It holds enormous financial reserves (more than 3,000 billion dollars and 1,948 tons of gold). Allied with China, Russia can deliver a heavy counter-attack.
Coercive militarization of financial vectors does not involve bloodshed, but it can nevertheless inflict substantial harm in terms of hunger and poverty, not necessarily on the target countries, but as unintended “collateral damage” to countries innocent “spectators”. Already, rising inflation and potential food shortages are sending worrying signals. Low-income countries around the world can only wait and see and build their own defenses to the best of their abilities against the unfortunate outcome of an ugly bullfight.
Dr Atiqur Rahman is an economist, former adjunct professor at John Cabot University in Italy and former senior strategist at IFAD.