The Russian invasion of Ukraine was a watershed moment for Western economic policy. The United States and its European allies were quick to impose harsh sanctions on Russia. Sanctions, however, did not become the turning point that the U.S. had hoped. The West was caught off guard by Russia’s territorial actions, but the sanctions were an all-too-familiar response, especially for the U.S. Just four years prior, the Trump administration unnecessarily pulled out of the Iran nuclear deal, which entailed a likely continuation of Iranian attemps at proliferation and reimposed harsh sanctions upon Iran. Russian sanctions were simply perpetuations of the United States using adversary entanglement in the US-led financial system to their advantage, specifically when Joe Biden requested to seize $300B in Russian assets frozen in the Federal Reserve. These actions are more commonly known as the ‘weaponization of the dollar’, as these sanctions are carried out through the SWIFT banking system, which uplifts the dollar as the global currency. The effects of this so far have been conclusive; the US is catalyzing de-globalization, and not for the better. The weaponization of the dollar’s current and future negative impacts are far too large for the US to continue the practice, especially when they have proven to have no positive impact in achieving U.S. foreign policy objectives.
First, the sanctions themselves have not actually worked. Despite economists predicting a steadily slow 1.2% growth in Russian GDP in 2023, the Russian economy greatly outperformed expectations, growing by 3.6%. Gas and oil exports have largely remained constant. These successes have all taken place during American and European sanctions. The sanctions themselves aren’t necessarily bad; isolating Russia, in theory, from exporting their plentiful natural resources would be the best way to cripple the Russian economy. Unfortunately for the West however, that has not been the reality. Russia once again continues their business as usual. Sanctions that aim to stop or slow tradeare not likely to work in the current environment. For instance, Russia has been India’s number one source of imported natural gas and oil. This particularly has left the US with a predicament: either punish India for trading with Russia (per the sanctions) which would harm US relations with an ally vital for curbing China’s global ambitions, or let it go, which puts in place a global precedent that implies that as long as a country is valuable to the US, they can violate their sanctions. Furthermore, illicit trading, such as Russo-North Korean trade, exacerbates sanction enforcement difficulty. Chinese trade with Russia has dramatically expanded over the past decade, accelerating during the war in Ukraine, providing additional financial, technological and economic support for the Russian economy. The U.S. must accept the reality that sanctions with the purpose of cutting trade simply won’t work.
The weaponization of the dollar has not only failed to achieve its short-term objectives, but also threatens to undermine longer-term U.S. foreign policy and economic objectives. Once again, the US threatened to go slightly further with Russia by seizing frozen Russian assets and giving it to Ukraine. The cause-effect relationship is simple here: the US-led bloc punishes adversaries who use the SWIFT banking system, which will cause adversaries to stop using it. More importantly, neutral or nonaligned parties may also stop using it if they want to continue to trade with countries like Russia and Iran or if they fear future imposition of U.S. sanctions on themselves. Regional, non-aligned powers such as India, Kenya, and Brazil are also on the list of countries transitioning away from a US-led economic system, mainly due to the BRICS alliance and protest of the American weaponizing of the dollar. This is materializing quickly, with India, Kenya and Malaysia signing de-dollarization agreements. Considering that the US dollar is the global reserve currency because of the US’ geopolitical heft and the amount of countries who use it, a mass transition away from the US dollar and its banking system will surely weaken the dollar. The consequences of a potential BRICS currency — or really any alternative currency — coming close to the dollar’s dominance will be detrimental for the American people. Any form of dollar devaluation would negatively affect every American household’s finances and further erode the soft power of the U.S.
How to stop this downward spiral? The U.S. must focus more on the root cause of this potential crisis and stop weaponizing the dollar. To further ensure trust in the dollar system, the US should prioritize diplomacy and military power— especially with Russia — over financial punishment. It must also be careful not to extend weaponization to imposing its values on other countries – particularly those in the Global South – which have views, laws or policies on social issues that differ from those in the U.S. Simply put, the U.S. must instill credibility into the current global financial system before it’s too late.
Works cited: https://www.reuters.com/world/europe/russia-cant-match-western-asset-seizure-it-can-inflict-pain-2024-05-02/
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