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Economics

Will Western Sanctions Change the Global Financial System?

Apr 28, 2022 Howard Davies

Western countries' increased use of financial sanctions as a weapon of war has created a new incentive for China and other countries to explore ways to minimize the future impact of similar measures against them. The longer-term consequences for the global financial system could be far-reaching.

LONDON – Faced with the horrors of Russia’s invasion of Ukraine, and recognizing the limited military options open to them, Western governments understandably deployed their economic and financial arsenal. Such sanctions have been imposed on errant countries before, of course, with varying success, but not to anything like the same extent as against Russia now.

Notably, the United States and its allies seized much of the Russian central bank’s foreign-exchange reserves, and cut off some Russian banks’ access to the SWIFT financial messaging system for international transactions. The world has learned a new word – “deswifting” – and the financial system has been weaponized as never before.

It is too early to assess the impact of the sanctions against Russia; there is no sign yet of a decisive effect on President Vladimir Putin’s regime or its policies. But the longer-term damage to Russia’s economy will probably be considerable.

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vic lai Apr 28, 2022

Whether the western sanctions will change the global financial system in the future, depends both on the current intention (or ambition) of the Russian and Chinese top leaders and on their knowledge about the nature of a global internationalized currency.
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If only little is being done, like Russia's current insistence on the use of ruble alone as both the unit of account and the medium of exchange for the natural gas (and other resource) transaction between the EU and Russia, the global financial system won't be much affected.
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If much more are being done, like Russia's (and China's) developing much further her country's central government treasury market, FX market, commodity market, stock market, and money market (including the forward market, repo market, derivative market), improving the banking system, and strengthening their domestic legal system, thereby enabling the Russian ruble to become also a reliable store of value and standard for deferred payment in international interactions, inducing the EU countries and many other foreign countries to accumulate rubles as part of the FX reserves of their central banks in the coming years, in direct competition with the US dollar, then the future global financial system will be much affected, and may transform from Bretton woods II to BW III much more easily in the coming decades.
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Today, contrary to popular opinion, too much credit has been given to the chairperson of Russia's central bank, simply because, when the internationalization of the ruble is concerned, "so little" has been done by her (and her boss) so far.
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- vic lai Apr 29, 2022
  
  I think, CBDC digital ruble, now being planned by the Bank of Russia (while banning cryptocurrencies in Russia at the same time), just caters to the unit of account cum medium of exchange function of the ruble as one of the world's potential international currencies, like China's own CBDC digital yuan does.
  If no new innovations such as digital ruble treasury bills or bonds or something similar are considered and propagated by the BOR at the same time, the other arguably even more important aspect of an important international currency ------- the store of value cum standard for deferred payment function ------ is still missing, meaning that the vitally important job of ruble internationalization is only half done, and the transition from BW II to BW III of the global monetary system will be further delayed or even impossible.
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  It's even better if Russia could, like today's US, has balance-of-payment deficits year-in and year-out, with little or no capital control, so that the international environment for the ruble acting as one of the world's important reserve currencies can be realized.
  Same for China's yuan.
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  - vic lai Apr 30, 2022
    
    Why does the EU "foolishly" insist on keeping sanctioning Russia, when she is fully aware that doing so will significantly bid up the energy and food prices in western Europe ?
    Why doesn't Russia finish the war in a short period of time but instead chooses to prolong it ?
    America seems to be standing to gain from this prolonged military conflict.
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    The longer the war lasts, the longer and more serious is the inflationary pressure in America (and elsewhere), thereby forcing the US Fed, or giving the Fed a legitimate excuse, to "suicidally" prop up the interest rates in the country, and so popping the country's bond-stock-housing market bubbles all at the same time, giving rise to another prolonged balance-sheet economic recession and hence secular stagnation in America as a result.
    Russia's demand for the EU to pay in rubles when the EU buys natural gas from Russia also facilitates the transition of the global monetary system from BW II to BW III, when many other similar resource-exporting countries will require their importing countries to also pay in their own currencies, and when more and more effective OPEC+-like cartels will be formed and enforced in the future.
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    It's said on the internet that the current Ukraine War has been a cryptic attempt by both Russia and the EU to try to dethrone the US Dollar in the global monetary system !
    America beware.
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