Veteran US journalist and geopolitical commentator Fareed Zakaria says that Russia and China are trying to dent the dollar's dominance as the anchor of the international financial system, and if that happens, "America will face a reckoning like none before". Fareed gave his take on how the unprecedented sanctions on Russia are driving other countries to find ways to reduce their vulnerability to America's financial reach.
In his weekly show on CNN, Zakaria asked, "The world's second-largest economy and its largest energy exporter are actively trying to dent the dollar’s dominance as the anchor of the international financial system. Will they succeed?”
The Indian-American political commentator cited the recently held three-day summit between China and Russia. During that meet, Russian President Vladimir Putin and Chinese President Xi Jinping agreed to increase settlements in Chinese yuan in its foreign trade.
Putin said, "We are for the use of Chinese yuan in settlements between Russia and the countries of Asia, Africa, and Latin America. I am sure that these forms of settlements in yuan will be developed between Russian partners and their counterparts in third countries."
The move is also quite significant as other global economies, including India, have started looking for alternatives to the dollar. It should be noted that India is also trying to find ways to diversify its trade settlements away from the dollar. The RBI has developed its own rupee payment mechanism. The move was aimed at facilitating trade with countries under sanctions such as Russia. Several countries, including Russia have shown interest in using the system. It has also been reported that Indian oil refiners had been using UAE’s dirham to buy Russian oil.
Zakaria on his show pointed out, "The dollar is America’s last remaining superpower. It gives Washington unrivaled economic and political muscle. The United States can slap sanctions on countries unilaterally, freezing them out of large parts of the world economy."
He said that sanctions imposed on Russia for its invasion of Ukraine combined with Washington’s increasingly confrontational approach to China have created a perfect storm in which both Russia and China are accelerating efforts to diversify away from the dollar. "Their central banks are keeping less of their reserves in dollars, and most trade between them is being settled in the Yuan. They are also, as Putin noted, making efforts to get other countries to follow suit," he mentioned.
According to Zakaria, dollar dominance is firmly entrenched, for many good reasons. A globalised economy needs a single currency for ease and efficiency. The dollar is stable; you can buy and sell it anytime, and it is governed largely by the market and not a government’s whims. However, he further said that the US’s weaponisation of the dollar over the past decade has led many important countries to search for ways.
"The share of dollars in global central bank reserves has dropped from roughly 70 per cent 20 years ago to less than 60 per cent today, and falling steadily. The Europeans and the Chinese are trying to build international payment systems outside of the dollar-dominated SWIFT system," he said, while adding, "America’s politicians have gotten used to spending seemingly without any concerns about deficits… The Fed has solved a series of financial crashes by massively expanding its balance sheet twelvefold, from around $730 billion 20 years ago to about $8.7 trillion today. All of this only works because of the dollar’s unique status. If that wanes, America will face a reckoning like none before."