Using dollar supremacy for sanctions is disruptive, says economist

Using dollar supremacy for sanctions could well lead to other countries backing away from it (the dollar)

London, UK | Xinhua | The U.S. government’s frequent use of dollar supremacy for sanctions against other countries could negatively impact global trade and finance, an economist has said.

“One of the problems with the whole idea of using the dollar for sanctions” is that it could be “disruptive” in the long term to the global trading and financial systems, Patrick Minford, a macroeconomist holding the chair of Applied Economics at Cardiff University, told Xinhua.

“The dollar is the world’s major reserve currency for all sorts of reasons, basically because it’s so dominant in world trade and has a long history of being a stable reserve currency in a safe haven,” Minford noted.

He said that it has enabled the U.S. government to use the dollar supremacy for “quite damaging sanctions programs,” as it is currently using against Russia.

“This may be quite a risky, longer-term policy if it does it too often, using sanctions in terms of access to the dollar area,” he warned.

Across the world, a bunch of countries have tasted the bitterness of U.S. sanctions since Washington set up the dollar’s global dominance in international economy.

In the mid-1960s, when fixed exchange rates based on the post-World War II gold standard were gradually replaced by a global system reliant on the dollar as the primary means of cross-border payments and reserves, France’s then Finance Minister Valery Giscard d’Estaing coined the phrase “exorbitant privilege” to bemoan a United States taking advantage of the dollar dominance for its self-interest.

Earlier this century, Washington executed the same playbook in dealing with the Iran nuclear issue, expelling Iranian banks from the international financial messaging system SWIFT and banning imports of Iranian energy. Even now, the Iranian economy is still struggling in the shadow of Washington’s sanctions.

The moment Moscow launched the military operation, Washington rushed to maneuver a ton of sanctions, removing Russian banks from SWIFT, freezing any Russian assets “touching the U.S. financial system” and threatening to “crush Russia’s economy.”

The latest sanctions have fueled sharp hikes in oil and natural gas prices around the globe. Sizable increases in the prices of key commodities are triggering accelerated high inflation in many countries and weakening the already faltering global recovery from the COVID-19 pandemic.

Besides, Minford noted that using dollar supremacy for sanctions “could well lead to other countries backing away from it (the dollar).”

For example, India’s central bank announced on July 11 that it had unveiled a new mechanism for international trade settlements in rupees, a move many said would reduce the country’s dollar demand and alleviate depreciation pressure on rupees.

“Countries that obviously don’t agree with the sanctions and want to do trade and have other sort of monetary relationships with sanctioned countries will increasingly fight back against dollar supremacy by using alternative settlement routes,” Minford said.