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America Has Stopped Playing by the Monetary Rules

The international financial and monetary system ultimately operates on trust, with all participants assuming that others will play by the rules. By unilaterally freezing Russia's foreign-exchange reserves, the United States has powerfully undermined its own credibility, not least in China.

BEIJING – In The Economic Weapon: The Rise of Sanctions as a Tool of Modern War, historian Nicholas Mulder reminds us that even when Britain and Russia were savagely battling each other during the 1853-56 Crimean War, they continued to service their debts to each other. Likewise, when hedge funds launched predatory attacks on Asian currencies during the 1990s Asian financial crisis, they ultimately still played by the rules (even though their unethical behavior brought some East Asian countries’ economic progress to a halt).

The United States’ February 28 decision to freeze around half of Russia’s foreign-exchange reserves would seem to fall into a different category. Though the US has taken similar actions against Iran, Venezuela, and Afghanistan, Chinese economists thought those were exceptional situations and find it shocking that the US would carry out such measures against Russia.

The international financial system is based on the trust that all participants will play by the rules, and honoring debt obligations is one of the most important rules there is. Whatever the justification, freezing a country’s foreign-exchange reserves is a blatant breach of that trust. The US, which issues the main global reserve currency, is jeopardizing its financial credibility for the sake of some elusive short-term tactical advantages. That is a big mistake.