Why the world is turning away from the buck

The invasion of Ukraine in February 2022 prompted the US Treasury Department to impose unprecedented sanctions on Russia, to hold it “accountable for its premeditated and unprovoked invasion.”

The aim was to prevent Russia from “prop[ing] up its rapidly depreciating currency by restricting global supplies of the ruble and access to reserves that Russia may try to exchange to support the ruble.” In other words, Russia wouldn’t be able to sell enough US dollars in the foreign exchange market to buy up Russian currency and bolster its value.

Indeed, US Secretary of the Treasury Janet Yellen called this an “unprecedented action” that would “significantly limit Russia’s ability to use assets to finance its destabilizing activities.”

Freezing a sovereign country’s dollar holdings (Russia’s in this case) is a seismic event. It risks accelerating a move away from the use of the US dollar for trade or investment by countries that have different geopolitical interests than the US, such as China or the Gulf states.

In fact, several governments outside the West are exploring ways to reduce their exposure to the dollar. Russia is currently settling a quarter of its international trade using Chinese renminbi, and its bilateral trade with China is almost entirely settled in the two countries’ respective currencies.

In March 2023, China settled a payment for UAE gas in its own currency rather than US dollars for the first time. Then in November, China and Saudi Arabia signed a currency swap agreement, citing a desire to expand the use of their currencies.

There are more troubling signs for the US dollar. Even though central banks’ foreign exchange reserves have been growing steadily year-on-year for more than 20 years, the percentage