After this war is over, ‘money’ will never be the same again.

Zoltan Pozsar, Credit Suisse

Financial sanctions against Russia by the West have been sweeping and devastating. There are concerns this could force Russia and others to seek alternatives to a global financial system dominated by the West.

In addition to personal sanctions against Putin and his inner circle of oligarchs and ministers, the West has targeted its lenders and central bank.

Once considered a “nuclear” option, a number of Russian banks were ejected from the Swift global payments messaging system, making it far harder for them to make cross-border payments. Meanwhile, the West froze half of the Russian central bank’s foreign currency and gold reserves, hindering Moscow’s ability to prop up the rouble and its banking system.

Under Putin’s Fortress Russia plan to insulate it from sanctions, Moscow had built up a $US640 billion ($884 billion) war chest of foreign reserves. The freezing of these reserves was considered a game-changing move. It prompted a plunge in the rouble and capital controls in the country.

Some fear this weaponisation of finance and the US dollar has long-term consequences, perhaps luring countries to a new rival sphere headed by China. Russian banks are turning to alternatives to the Belgium-based Swift in order to smooth cross-border payments. Its central bank has its own system it has already offered India for rouble payments, while China also has an alternative that could rival Swift.

Moscow’s lenders have turned to China’s payment giant UnionPay to help them issue debit and credit cards after Visa and Mastercard joined the exodus from Russia, blocking access to new cards by the payment giants. The payment heavyweights accounted for 70 per cent of the Russian debit card market.

Russian banks and Mir - a payments system Moscow set up after its annexation of Crimea - hoped to team up with UnionPay to issue cards. However, reports suggested last week that UnionPay is getting cold feet, fearing Western sanctions.

Fears of a split have also rekindled the long-running debate over whether the US dollar is at risk of losing its status as the world’s reserve currency.

“After this war is over, ‘money’ will never be the same again,” said Zoltan Pozsar at Credit Suisse as he declared a “new world (monetary) order” following the freezing of the Russian central bank’s reserves.

The US dollar has been dominant across the globe since the Second World War, becoming the world’s reserve currency. This is the currency held most by central banks as part of foreign reserves and financial institutions to help facilitate global trade. Countries, including China, have amassed almost $13 trillion in foreign reserves - around 60pc in dollars. As the sanctions on Russia have shown, however, those reserves could suddenly become useless if they are paralysed by the West.

Dollars have also been vital for global trade, being used for everything from invoicing in international business to buying commodities, such as oil.

Russia, however, claims several buyers have agreed to pay for its gas in roubles while Saudi Arabia is reportedly considering accepting China’s currency for oil sales to Beijing amid tensions with Washington.

“This was a weapon that the US had been increasingly using,” says Perkins. “There’s always been warnings going back at least a decade, saying ‘you can’t keep doing this over and over again’ because eventually you get to a point where you change the status of the dollar. It’s just this is so high profile.”

He says there is now a “turning point”, but highlights that any move away from the dollar would be slow.

Others are sceptical that such a major transformation is in the works, however. Prof Barry Eichengreen, an expert at University of California, Berkeley, says the threat to the dollar’s status is low given the lack of a credible alternative.

“The US was joined by the euro area, the UK, and Japan, among others, in imposing financial sanctions,” he says, adding that the Chinese renminbi is “an unattractive alternative” for most countries. “Only governments in extremis, such as Russia’s, are likely to significantly increase their reliance on China’s currency.”

Meanwhile, Paul Donovan, chief economist of UBS Global Wealth Management, says the concept of a reserve currency will become less important as world trade “is likely to become less global over time”.

“If you are doing less global trade, then the importance of a global invoicing currency is less and central banks don’t need to hold quite so much in foreign exchange reserves.”

He believes the global economy is not going through a splintering but a localisation effect where digitisation reduces the need for physical trade and production moves closer to consumers, such as clean energy over imported gas.

“A localisation process is something which doesn’t necessarily split the world into two, it splits the world into 196.”

Telegraph, London

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