Why Cutting Russia Off From Global Banking Will Bite The United States

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Why Cutting Russia Off From Global Banking Will Bite The United States
The overuse of financial sanctions risks much of the world losing confidence in the dollar as the world’s reserve currency.
By Willis L. Krumholz
March 11, 2022

America cutting off Russia’s central bank from its U.S. dollar reserves could carry huge consequences that the D.C. establishment hasn’t considered.
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The dollar is the world’s reserve currency because a large amount of global commerce is priced in dollars, and the U.S. legal system and open capital markets mean American dollars can buy American assets while the owner is protected by the rule of law.

This status as the world’s reserve currency gives Washington immense power, because at the end of the day all dollar transactions must undergo clearing and settlement (fancy words for transferring ownership then recording who owns dollars) at U.S. banks connected to the institution that controls the U.S. dollar, which is the U.S. Federal Reserve.
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the move will prompt Russia to shift its central bank holdings, which back the value of the ruble, toward Chinese assets and gold. Sindreu correctly points out this will lead to more trade regionalization and deglobalization.

It also boosts the Chinese renminbi’s (RMB’s) status as a competing reserve currency. Previously, the knock on the RMB was that China lacks rule of law and one might not actually be able to use the RMB to buy Chinese assets, or one might not be able to eventually get money out of China. Now, for many parts of the world, the dollar increasingly has similar problems.

D.C. Elites Don’t Know What They’re Doing
But the impacts could be even further reaching. Aside from simply making the RMB a slightly stronger competitor against the dollar, in a fight where the dollar still clearly has the upper hand, the move emboldens China and helps its economy.

Sanctioned countries, or countries that might get sanctioned, are now dependent on doing business with China, and the Western elite is likely too dependent on China to fully penalize or sanction China for being the central economic hub for the growing list of countries excluded from the West’s economic system. This gives China a monopsony-like status to buy Russian or Iranian energy at a discount.

Lest you think the countries on the sanctions list are only the ones that keep neocons up at night, Europe ran the risk of being sanctioned because of trade with Iran. The Biden administration has also recently and stupidly threatened India with sanctions, because of its ties to Russia.
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Far from ushering in a smooth transition away from a system that has benefited the coastal elite over Middle America, they are rushing Americans toward less purchasing power and massive shortages and price increases here at home. It’s incredibly dangerous and shortsighted.

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