Is Russia’s decision to price energy in roubles a threat to the US dollar? 2023

The thought that Russia will no longer accept dollars as payment for its energy has sparked a lot of interest. Russia would prefer gold (“hard currency”) or roubles in general but will accept most other national currencies as long as they aren’t greenbacks.

Is this the beginning of the end for the US dollar’s hegemony?

“No,” is the answer.

Here’s why…

The United States decided that the role of the “World Police” was a burden and responsibility that it could no longer bear. Long ago, the US dollar was also “weaponized.” This weaponization first became apparent in 2012, when Iran was sanctioned for its nuclear activities.

Anyone who feared that the US dollar might not be a financial operating system compatible with their own country’s values or ambitions had ample reason to seek alternatives long before the most recent sanctions were imposed on Russia.

Yet, for a long time, the US dollar has been declining as a share of central bank reserves. According to economics professor and general currency commentator Barry Eichengreen, who wrote in the Financial Times the other day, the US dollar accounted for roughly 70% of foreign exchange reserves in 2001. It now accounts for only 59% of the total.

As a result, dollar dominance has been on the decline for some time. (Though “decline” is probably the wrong word in this case, because the majority of the move out of the US dollar has been into smaller currencies – such as the Australian dollar, South Korean won, and Swedish krona – that have become increasingly viable as their markets have deepened, i.e. become more like American markets.)

All of this is to indicate that we live in perplexing times and that we are “already seeing movement toward a more multipolar international monetary system,” as Eichengreen puts it. Since the 2008 financial crisis, I believe it’s also fair to say that the world has been silently looking for an alternative to the post-1970s monetary order.

But I don’t feel that Russia’s desire to trade energy in anything other than US dollars is particularly significant in terms of this hunt for a new monetary order.

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…but what about the alternative?

You could argue that money printing is undermining the US dollar. One could argue that the United States is becoming less reliable as a partner, given its willingness to cross the Rubicon to cut countries off from the global reserve currency.

However, you must have a backup plan. History has shown that reserve currencies give way to one another when a more appealing alternative emerges.

This is usually because the dominant power is on the decline, while the up-and-coming power is on the rise. As a result, the pound gave way to the US dollar. However, this is merely a symptom of the fact that capital flows to where it is best treated and where there are the most opportunities.

Russia has lost capital of all kinds as a result of the war – financial, human, and social capital. To prevent capital from fleeing its borders, the country has had to impose capital controls. This is not a strategy for dethroning the global financial hegemon.

Think of it this way. Does Russia’s desire to trade Russian energy for anything other than US dollars entice the world’s interest in finding an alternative to US dollars? Or, on the opposite, does it make most countries more eager to find an alternative to Russian energy?

Neither Russia nor China, today’s rising power, has shown any reason to be trusted with your hard-earned money. Property rights in Russia have always been based on “gangster norms” and “might is right.”

When it comes to selfish international investors mindlessly recapitalizing China’s banking system or dumb manufacturers turning over their intellectual property in the hopes of reaching a billion-plus Chinese consumers, China welcomes foreign capital.

But, as you can see, when businesspeople or shareholder capitalism begin to flourish and threaten the Communist Party’s or the social order’s grip, disaster ensues. Mouthy entrepreneurs and A-listers vanish, only to reappear three months later, miffed.

China recognizes that its recent approach has been detrimental to foreign investment and is attempting to reverse it. As a result, Chinese technology stocks have recently surged. This also explains its hesitant support for Russia.

But I’d be very cautious about putting your money to work there.

The real threat to the US dollar is the US abandoning its values.

None of this means that the US dollar will always be the world’s reserve currency. That’s not how it might be.

However, the real threat to US dollar hegemony is internal. The real danger is that the United States abandons the principles that make the dollar value as a reserve currency: rule of law; enforceable, well-respected property rights; and the protection of those rights for all, regardless of political ideology or socioeconomic status.

That is why all of this “culture war” nonsense is so important. Internal authoritarianism poses a far greater danger to US dollar hegemony than hostile nation-state authoritarianism.

In other words, the real danger of weaponization arises when a currency is used against its people.

Aside from that, the US only has to be concerned if and when China decides to open up and embrace democracy and completely free markets. The money would pour in. But I think most of us would be okay with that because it’s a rather benign regime change.

After all, it’s not as if Britain vanished once the pound was no longer the world’s reserve currency, despite the masochistic pleasure some British people take in remembering its decline. The pound is still valuable, and London remains one of the world’s most important financial centers, thanks to a strong commitment to property rights. Values are important.

So, what could replace the US dollar?

So, what about the long run? So, if you agree with my basic thesis – that this is based on values and property rights – then I believe bitcoin, or something similar, will pose the greatest threat to US dollar hegemony.

There’s a lot of utopian nonsense surrounding cryptocurrencies, but the fundamental premise is appealing. Indeed, it is a currency founded on the same principles that underpin the US dollar and US democracy: secure property rights, individual liberty, and transparency without sacrificing privacy, to name a few.

(In fact, the idea of bitcoin is so appealing that I’ve always thought that if you were a bad actor looking for a way to undermine the status of the US dollar, you’d be hard-pressed to find a better way than to create something like bitcoin and then launch it during a world-shaking global financial crisis. That, however, is a conspiracy theory for another day.)

Anyway. Debasement – whether of the currency’s actual value or the philosophical values that underpin it – is a genuine threat to the reserve currency at all times. There’s a good chance of that happening.

And you should have some gold. It’s a solid disaster hedge, it performs well when inflation surprises on the upside, and it’ll almost certainly remain in demand if authoritarian countries’ central banks seek ways to diversify.
But Russia wants to be paid for its oil in a currency other than US dollars? I just don’t think it’s a big deal in and of itself.

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