Sanctions and de-Dollarisation

De-dollarisation is not a new phenomenon. There has been discontent amongst national economies against the use of the USD in international trade because they believe it gives the US too much power and can be used as a tool in its geopolitical arsenal.

China, for example, has been slowly trying to chip away at the prominence of USD by strengthening its financial systems and infrastructure. China has also isolated the USA from its belt and road initiative (‘BRI’) which serves, not only to highlight tensions between China and US, but also to show the world that America is not central to economic growth and development.

Saudi Arabia has been a long-standing user of the USD as a reserve currency, likely due to its influence within the oil industry. However, the gulf country recently announced that they were open to trading in other currencies in addition to USD. Something they haven’t done in nearly 50 years. Again, weakening the premise that dollars are king, and decreasing the importance of the USD across the globe and industries.

The Ukraine war and the sanctions imposed by the US on Russia appears to have inadvertently created a recent surge in the de-dollarisation process.

The US joined in with other countries in its decision to impose financial sanctions on Russian entities and individuals in the hope that these financial restrictions would act as a deterrent to Russian aggression in Ukraine. The US Treasury Secretary commented on de-dollarisation that “economic sanctions against countries like Russia could undermine the dollar’s hegemony in the global economy.”  One of the restrictions imposed on Russia was the country’s inability to use payment systems. So, in retaliation, Russia established its own payment system (‘MIR’) and financial information exchange system (‘SPFS’). These systems have created a foundation for Russia’s financial infrastructure without involving USD.

Additionally, Russia’s trade has shifted towards countries such as India and China. Since the invasion of Ukraine, China has become Russia’s leading export partner. From January to May 2023, bilateral trade between the two totalled more than US $93.8 billion. A 40.7% increase compared to the same timeframe in 2022.[1]

The increase in trade between countries other than the US has created a paradigm shift from the US’s hegemonic status. BRICS (Brazil, Russia, India, China, and South Africa) nations are becoming more influential across the globe; it is estimated that they now account for approximately 40% of the world’s population and have an aggregated global GDP of 31.5%. Surpassing the G7’s (United States, Canada, France, Germany, Italy, Japan, and the United Kingdom) GDP of 30.7%.

The BRICS group have also recently expanded its membership.  From 2024, Iran, Saudi Arabia, Egypt, Argentina, the UAE, and Ethiopia will join the economic bloc. The admission of these countries can be seen as a move to increase the global south’s stance on the world stage as members that reflect a mixture of “powerful autocracies with middle-income and developing democracies.”[2]

For countries like Iran, who have also been faced with sanctions by the West, admission to BRICS is a way to ‘side-step’ economic restrictions and try to build up strong economies that do not rely on USD and trade with Western countries. The BRICS group have also recently announced plans to develop an international currency which could compete against the USD as a global reserve currency in the upcoming years. However, it is too early to predict whether this will be a success. When the previous international currency, the Euro, was announced, it was speculated that this could overtake the USD. But, despite its wide usage, was not able to match it.

Venezuela applied for 2024 BRICS membership but was unsuccessful. President Maduro has been vocal about his stance towards the USD and its dominance in the global economy; Venezuela are another country whose economy has suffered at the hands of US sanctions, which appears to be driving President Maduro’s request for change.

At the August 2023 BRICS conference, President Maduro criticised the USD as a tool for economic warfare noting that the sanctions imposed on Venezuela have harmed both human rights and economic development in the country. He has also voiced his support for the creation of a new financial system that consists of national currencies that would hopefully enhance local economies as well as decrease the dependence on the US and USD.

It is becoming more evident that those who have fallen victim to US sanctions are driven to establish a way that will lessen the impact of the restrictions. Essentially a transition from USD dependency.

This shift in attitude partnered with the consistent evolution of the global order makes it difficult to predict what the future holds for the international reserve currency, and whether the world will succumb to de-dollarisation.

This presents new challenges for asset tracing and enforcement strategies that have historically sought to target correspondence banking facilities for recoveries. These correspondence banks are often in favourable enforcement jurisdictions, sympathetic to orders set down by English courts. Cases involving cross border enforcement will need to adapt in lockstep to the evolving international financial landscape in order to preserve options for recovery.

Quintel provides international enforcement strategies for law firms and litigation funders seeking to understand the recovery landscape prior to undertaking recovery efforts or investing on a claim. For more information, please contact info@quintelintelligence.com.