Russia Sanctions Demonstrate Power Of The US Dollar, But How Long Will It Last?

Not only have U.S. and EU sanctions on Russia sent the ruble tumbling 38% year-to-date in 2022, but they've also once again demonstrated just how much power the dollar gives the U.S.

Sanctions Pressure The Ruble: Russians are reportedly lining up to withdraw cash from ATMs, and the Russian government may not be able to make upcoming bond payments. By cutting off Russia's access to the dollar, the U.S. is choking off the lubrication its economy needs to function properly. Half of all international trade currently takes place in dollars, and about half of all the world's bonds and loans must be repaid in dollars. Incredibly, about 90% of all currency trades also involve the dollar.

In the near term, the U.S. is effectively weaponizing the dollar against Russia, but the current U.S. sanctions may have a negative long-term fallout. If Russia, China and other U.S. adversaries create their own parallel trading system that doesn't involve the dollar, the dollar's age of dominance could eventually come to an end.

Related Link: Russian Invasion Creates 'Upward Pressure On Inflation,' Powell Says

Possible Dollar Alternatives: Fortunately, as of 2022, there aren't many viable alternatives to the dollar that are both stable and liquid. China's yuan is relatively stable, but the Chinese government's authoritarian nature can make the "non-convertible" yuan difficult to access for investors. International investors are also well aware that the Chinese government, not the free market, controls the financial system in China.

Cryptocurrency enthusiasts have floated the idea of Bitcoin BTC/USD or other cryptocurrencies as a replacement for the dollar, but Bitcoin's wild swings in price on a day-to-day basis makes it too unstable to be a short-term store of value. Still, U.S. Federal Reserve Chairman Jerome Powell seemed to acknowledge cryptocurrency's potential as a reserve currency last week when he told Congress that it's possible for the world to have multiple reserve currencies.

“[The Ukraine-Russia conflict] underscored the need for Congressional action on digital finance, including cryptocurrencies,” Powell said. “We have this burgeoning industry which has many parts to it, and there isn’t in place the kind of regulatory framework that needs to be there.”

Dollar Advantages: On the other hand, Citigroup recently said there are simply too many advantages to the dollar compared to cryptocurrencies at this point.

"Crypto to replace the role of Treasuries that stand behind the dollar? Nowhere close,” the Citigroup analyst said. “To move out of Treasuries is to give up yield, liquidity, transparency and security for what exactly?”

For now, gold may be the best alternative for global central banks looking to avoid the risks associated with holding the dollar or other fiat currencies on their balance sheets. The Wall Street Journal reports that Russia has significantly increased the amount of gold it is holding in reserve since 2013, while it has decreased its U.S. dollar allocation dramatically.

Bezinga's Take: So far in 2022, the global financial market has spoken, and the dollar remains the world's preferred reserve currency. The Invesco DB US Dollar Index Bullish Fund UUP is up 3% year-to-date, while the SPDR Gold Trust GLD is up 9.8% and the Grayscale Bitcoin Trust GBTC is down 23.5%.

Photo: Courtesy of tom_bullock on Flickr