October 5, 2024

The Catholic Transcript

Complete News World

Side effect of US sanctions against the dollar and Russia

Side effect of US sanctions against the dollar and Russia

As the dollar depreciates internationally, so does its value. Domestically, that is, high inflation in the United States. Internationally, the country’s less influential power, especially the economy.| Photo: Pixabay

Russia’s invasion of Ukraine will not only affect soldiers on the battlefield or people fleeing their homes. Its impact is global, political and economic. Sure, it may seem like almost a clich at this point in the events, but unfortunately it is always necessary to reinforce this vibrational nature of the war. In international politics as a whole, in fact, there is a reason this place exists. However, the scene shows very profound changes. War is taken to be a hurricane, a storm that lasts for an hour. This is somewhat true, but some of the consequences will be long-lasting, with large-scale impacts on the international order.

In the short term some effects are already felt, some very obvious. It is a war involving Russia, a nuclear power, that is causing fear and uncertainty. Nevertheless, Russia is the third largest oil producer, the second largest producer, the largest exporter of natural gas, the third largest producer, the largest exporter of wheat, and the largest producer of many grains. Until the beginning of the war, it was the tenth largest economy in the world in nominal values, and the sixth largest in purchasing power parity. On the other side of the conflict is Ukraine, “Europe’s bread basket”, one of the largest producers and exporters of agricultural products.

This conflict is driving up the prices of fuel, energy and various grains and foods. And by 2022, it makes no difference whether you live in a country that imports food or are an agricultural powerhouse like Brazil. What determines the price is the international market, in dollars. And the price of fuel affects not only the citizen who owns the car, but all the prices of all goods. Goods, inputs, labor, everything has to be carried, again, the price is in dollars. All of these may seem basic and primary to some readers, but others require clarification or reminder.

See also  An interesting city in America is named after "Corpus Christi" and the holiday

The use of the dollar

Double quoting for the dollar is not an accident. In particular, of course, the US dollar is the main currency for world prices, trade, reserves and savings. The strength of the dollar feeds US international influence. The North American nation grew into a power in the early 19th and 20th centuries, going hand in hand with the beginning of the adoption of the dollar as the international currency. After the Great War, which devastated European economies, the use and acceptance of the dollar increased even more, especially to finance war or restructuring loans.

This growing importance will be part of the conspiracy theories and hatred that fed Nazism, both nationally and ethnically. The situation in Germany would be “wrong” for “American Jewish bankers” and many more. During World War II, the Bretton Woods Conference came into being in 1944 with a conflict in which the United States played a major role as an industrial and financial power, establishing the dollar as the international reserve currency. Another important chapter in this path is the oil shocks, when the price of “black gold” skyrocketed after the price manipulation of the producing countries, mainly the Arab countries. These prices are, of course, negotiable in dollars.

This historical review illustrates an important and sometimes overlooked point. The dollar is a Fiat currency, like most contemporary currencies. It is not supported by a metal, has no intrinsic value and its transfer rate is volatile. Primarily, fiat currency is a bond of trust that people and companies expect to be the guarantee of value gained in exchange for products or services. Extensive trading network, the confidence of that currency should be broad and verifiable. In other words, the hundred dollar bill is, in essence, a piece of paper, but the value set aside for it creates the confidence that it will be valued in economic transactions.

See also  US stocks run lower after the financial war against Russia - 02/28/2022 - Market

In essence, in the international arena, the dollar is used because it is reliable. At the same time, much of its trust, i.e. the value attached to it, comes from the breadth of its application. It is an important part of American power and influence. When the dollar is the national currency of a country, more than 60% of the currency in circulation is held abroad, outside the country of issue. As the dollar depreciates internationally, so does its value. Domestically, that is, high inflation in the United States. Internationally, this indicates the country’s less influential power, especially the economy. Rather than a military power, the United States is an economic power and the center of global finance.

Removal of restrictions and currency

In a matter of days, Washington used such force to prevent Russia’s central bank from accessing more than $ 400 billion of Russia’s $ 630 billion in reserves. Withdrawal of a portion of Russian commercial banks from the International Monetary Fund, sanctions against SWIFT and large corporations almost immediately froze about $ 1 trillion in Russian assets in circulation. The Biden administration did not even need to change the course of an aircraft carrier to cause massive damage to the Russians, as they could not access their own money because it was not in their own currency. At the same time, this Washington-based power shows that the economies of other countries are vulnerable.

Of course, it is important to clarify that Russia occupied Ukraine in the war of aggression. The victims were ordinary Ukrainian people. However, in a state logic, where interests, strengths and weaknesses lie, Russia has exposed itself in an economic war, as opposed to the economic strength of the United States. In international law, Russia questions the legitimacy of the unilateral sanctions adopted by Washington, the UN. It says sanctions can only be imposed within the framework of the Security Council. Despite the legal debate or accusations of “abuse of economic power” against the United States, other countries are aware of the situation and know that they do not have the economic power or political environment to criticize sanctions. Still, they ask themselves: What if one day this happens to us?

See also  Haitian judges refuse to investigate the assassination of President Jovnell Moyes

Last week, two news items in this area were not just coincidences with the events in Ukraine. According to The Wall Street Journal, Saudi Arabia is in talks with China to trade oil in the renminbi, the Chinese currency known as the yuan. The talks are part of talks to build a massive refinery in China as a result of a partnership with Saudi state-owned Aramco. The other news is that India wants to use Renminbi as a reference currency for trade with Russia, which will be carried out in rupees and rubles. China and Russia also trade in their respective currencies.

The diversification of the basket of currencies, sometimes called “de-dollarization,” was a dream for Washington as it was used in international trade by economic heavyweights such as those mentioned above. This is a possible side effect of the rapid and comprehensive US sanctions against Russia. For Saudis and Indians, diversifying their currency basket means they are less vulnerable to sanctions. You may think that today is the war in Ukraine, tomorrow it is the war in Yemen or Kashmir. The effects will be minimal in the short term, but they cannot be ignored in the medium and long term, weakening the US economy and the dollar, one of the nation’s biggest weapons.