The war in Ukraine will have longer-term consequences for the international financial and monetary framework.
To paraphrase Ernest Hemingway, change in the macroeconomy and global financial system happens slowly and then all at once. Wars have similarly proven to act as catalysts for these systemic recalibrations. With the Russian invasion of Ukraine more than a month old, it is time to take stock of what has happened and infer what the longer-term consequences of this war might be, particularly for the global financial and monetary framework.
Third, much to the chagrin of Ukrainian President Volodymyr Zelensky, the world is still buying Russian oil and gas, a critical source of foreign exchange for President Vladimir Putin’s war machine. Although Europe would love to immediately cut all purchases of Russian gas, the European Commission believes that to do so would be economic suicide. Instead, the continent is intent on phasing out Russian gas incrementally before 2024. The UK has indicated that it will do much the same.
First, one would expect that sanctions on the Russian central bank and commercial banks will aid the development of financial centres in East Asia, which are still happy to lend and indeed borrow from Russian financial institutions. China and India, in particular, have become key sources of liquidity for the Russian financial system, with Russian banks quadrupling their trading volumes of RMB , according to Bloomberg.
It must be a source of great concern and frustration to countries that are seeking political agency outside of the West – in particular China and India – to know their astronomic foreign reserves could be at risk and depend on kowtowing to the US and Europe. China, India and other emerging markets could therefore seek to emulate Russia and increasingly diversify away from the greenback to find alternative currencies, assets and markets in which to stash their cash.
Currencies do not die with wars. However, history has shown that they have a massive impact on shaping and speeding up changes to the global financial architecture. The First World War heralded the collapse of the gold standard, and the end of the Second World War brought about the Bretton Woods set of institutions that underpinned the dollar’s reserve status, a system largely designed by John Maynard Keynes.
Another long-standing stumbling block for an alternative to the dollar is the extremely unstable political relationships between those that might seek to oppose it. Though Russia, China and Pakistan are seemingly deeply aligned, India is at war with two of those would-be emerging partners.
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