POWER OF GREEN PAPERS

It seems the position of the U.S. dollar as the leading currency in the system of international payments is unshakable for the reasons well known. First, oil and gold are priced in dollars. Secondly, the U.S. dollar is used globally for almost all international transactions. Thirdly, global reserve assets are stored in the U.S. currency. However, we can hear a growing number of arguments from politicians and experts not only about the possibility, but even about the urgency to de-dollarise the world economy. Incidentally, these statements are made by the leading Western financial publications and think tanks.

The insurgents

In its recent article The Tyranny of the U.S. Dollar, Bloomberg is trying to figure out the exceptional role of the U.S. currency, which "gets what amounts to a permanent, interest-free loan from the rest of the world" allowing "Americans collectively to consume more than they produce — to live beyond their means." Moreover, author notes that the dollar retains its strength despite the declining U.S. share in the global economy and "President Trump is retreating from the American chief executive’s traditional role as Leader of the Free World." So, is it possible that the dollar fails globally?

The Financial Times wonders if Russia can stop using the American dollar. In fact, this happened in early October, when the Russian government announced its plans to de-dollarise the Russian economy, which implies a gradual transition to payments for export and import transactions in other currencies. The Kremlin also expects to abandon the dollar in the sales of its strategic export commodity, oil. Russia continues to reduce its assets in dollars, buys gold, while Russian banks and companies are trying to transfer the significant share of their debts from dollars to roubles.

China and even Turkey greeted Moscow's initiative. China itself is already challenging the domination of the dollar in world energy markets. Thus, in 2018, Beijing introduced the first non-dollar criterion for the sales of raw materials in Asia - gold-backed futures contracts (petroyuans), which are increasing the trade volumes with the Russian Federation with yuan and roubles. In general, Beijing has initiated quite a large campaign against the U.S. dollar, albeit it is not that visible in the media and deserves a separate discussion. Turkey also declared its readiness to consider the likelihood of trade with Russia in national currencies. But is there a real threat to the U.S. dollar?

Power of dollar

You can find thousands of academic, expert and even conspiracy sources about the rise of the U.S. dollar as a global currency. In fact, there were two turning points in history that guaranteed the domination of the U.S. currency: the World War II, after which America became even more powerful than it was before, and the abolishment of the gold standard in 1971 followed by the approval of the floating exchange rate system. Critical opinions about the dollar are also available in various books and on the Internet. In general, they all boil down to the fact that the American currency is nothing but "a classical Ponzi scheme", "a beautiful funny money", "little green unsecured debt bills", etc.

Serious experts note however that such statements are ridiculous because the dollar is secured by the world's largest economy, the strongest and stable global banking and political systems, technologies, and, last but not the least, military power, which ensures the control over resource-rich countries, maritime trade routes, etc. Even the huge national debt of the U.S. is a guarantor of a stable dollar. It is also a convenient trade instrument, since it is more logical to enter into transactions in the currency of the country that has the highest degree of reliability. All financial flows are interconnected; their movement is based on a traditional system, which, if abandoned, may provoke bizarre shocks and losses. Obviously, nobody wants that happen. Either way, dollar should at least have an alternative. But neither the rouble, nor the yuan, nor even the euro have reached that status so far.

So, as far as the Russian plan to abandon the dollar is concerned, it suffices to mention that the export of hydrocarbons is half of the federal budget of this country. In addition, the Russian economy is not so large to change the global economy.

Who is suffering from sanctions?

It is a lot more interesting to answer the question why the issue of de-dollarisation is publicly voiced now rather than the perspectives of such initiatives.

As a matter of fact, it is the Americans that are pushing the rest of the world to abandon the dollar. Sanctions, embargoes and other economic and financial prohibitions have become common tools of pressure used by the U.S. against the countries with which they have differences on international issues. The same is true for the measures taken by Washington in trade wars. For example, in September, the U.S. introduced a 25 percent import duty on more than three hundred Chinese commodities.

However, the threats to restrict the use of American currency in financial settlements and lending by 'rogue economies', as the White House considers them, make huge volumes of the dollar superfluous, same as the introduction of fees compels the sanctioned states respond with countermeasures. The "punished" countries are looking for ways out of the pressure. Western media recalls the warning of Jacob Lew, Secretary of the Treasury under the Obama administration, made in 2016 about the danger of sanctions. He particularly noted that they could "undermine the American leadership in the global economy and the effectiveness of the sanctions."

Moreover, the recent events around the nuclear deal with Iran show that Washington is ready to use the sanctions even against its allies, the EU, as long as the third countries continue doing business with Iran. The Europeans are, of course, outraged - they took it as an encroachment on their sovereignty. "We cannot accept, as Europeans, that others — even our closest allies and friends — determine and decide with whom we can make business with or trade," said Federica Mogherini, the head of the European Union’s foreign policy. EC President Jean-Claude Juncker described the situation as "absurd" when "Europe pays up to 80% of its energy import bills - 300 billion euros per year - in U.S. dollars, when only about 2% of European energy imports come from the United States… It is absurd and ridiculous that European companies buy European aircraft in dollars instead of euros. That should change," says Juncker. Mr. Juncker believes that the euro should strengthen its position as a world currency and "instrument of European sovereignty." In August, the French Minister of Finance Bruno Le Maire said that he wanted to have financial instruments that were "completely independent" from the United States: "I want Europe to be a sovereign continent, not a vassal." Now Brussels is developing a payment system that would allow its companies to do business with Iran, bypassing American sanctions. Also, finance ministers of the EU will try to convince the U.S. administration not to disconnect Iran from the international payment system SWIFT.

Considering all these fats, it is possible to make the following conclusion: the anti-dollar movement has purely geopolitical roots. After all, everyone seems happy as far as the financial side of the matter is concerned. Stability and predictability are the best friends of any capital. Washington cannot but see the consequences of its decisions, which will undoubtedly adjusted at a later stage.

Mysterious FRS

On the other hand, we should keep in mind that the dollar does not entirely depend on the White House and the American president. The principal institution controlling the dollars in the United States is the Federal Reserve System, which also serves as a central bank responsible for the emission of dollars. When the US government needs funds to stabilize the economy, etc., which ultimately contributes to the power of the dollar, it gives the Fed treasuries (debt), and in response, the Fed prints banknotes called dollars.

The most interesting point is that the Fed is an independent agency. In other words, it is not controlled by the president (although is limited to reporting to the Congress), and the orders issued by the Fed are as effective as federal laws. The form of ownership of the agency is private - joint-stock with a special status of shares, the owners are the largest commercial banks. In fact, this is a privately owned central bank. Nobody knows the names of all Fed owners, but it is known that in part the Fed is owned by other states. However, if the dollar is so powerful, is it possible that the interests of those who rule over the dollar are not taken into account in global events and processes? Of course, they are taken into account.

But there is another aspect. Large holders of treasuries are companies, private investors, but also states, such as China, Japan, the United Kingdom, Ireland, South Korea, Germany, Brazil, the Cayman Islands, Switzerland, the Saudi Arabia, India, and Russia. At the same time, given the huge public debt of the United States, US treasuries remain 100% liquid and popular. That is why the dollar-based system is widely considered a financial pyramid, for it is believed that subsequent buyers of treasuries fund the payments of the previous owners of treasuries. Surprisingly, the largest debt holder of the US Treasury is the Fed itself. It turns out that dollars simply move from one pocket to another.

It is up to the readers to draw conclusions. In the global financial system, all actors totally depend on each other regardless of the national borders. And no one is going to shoot himself in the foot. Any talks about de-dollarisation, namely the "ways to circumvent sanctions", etc. is, in fact, just part of a global geopolitical and financial game. It absolutely should not worry those who receive a certain monthly income (in terms of dollars) for tangible and visible work. That is why the head of the Russian Central Bank, Elvira Nabiullina, said that the Russians need not be afraid for their bank deposits in foreign currency, "since no one is going to withdraw the dollar from circulation" in Russia.