The Biden administration deserves huge credit for the tough economic sanctions it has been able to impose on Russia in response to its invasion of Ukraine. As Gary Clyde Hufbauer and Megan Hogan note in a March essay, they “are the most comprehensive imposed against a major power since the Second World War.” On a “punishment scale of 1 to 10” — the two authors give the sanctions a ranking of at least an 8.
But the unprecedented nature of these measures is producing concerns around the world that the United States has “weaponized” its financial power and could lead, over time, to the decline of the dollar’s dominance, which is what gives America its financial superpowers in the first place.
I’ve been hearing about this firsthand from three sources I trust. The first, in New Delhi, recently told me about a conversation that took place at the highest levels of India’s government. The topic: how to make sure that the United States could never do to India what it has just done to Russia. The second, from Brussels, where staff at the European Commission has been tasked — even while working with Washington on the sanctions — with finding ways to reduce the role of the dollar in its energy imports. The third, an Asian observer of China, speculated that the overly severe lockdowns in Shanghai — which involved the rationing of food and basic supplies — might be part of an effort by Beijing to experiment with a scenario in which it faced economic sanctions from Washington (perhaps after an invasion of Taiwan).
A debate is raging around the world about whether the dollar’s total dominance of the international financial system is waning. Even Goldman Sachs and the IMF have warned that that might well happen. I tend toward the opposite view: Namely, that you can only beat the dollar if you have an effective alternative, which so far does not exist.
But it’s clear that many countries — from hostile powers such as China and Russia to friendly nations such as India and Brazil — are working hard on ways to reduce their vulnerability to Washington’s whims. None of these efforts has so far gained much traction, though it is worth noting that the share of global foreign exchange reserves held in dollars has declined from 72 percent to 59 percent over the past two decades.
Partly this is because the United States appears less stable and predictable in the use of its extraordinary privilege. In the two decades preceding Russia’s invasion, Washington massively ramped up sanctions for all kinds of reasons — by more than 900 percent. Many of these measures were overreactions and should be rolled back. After 9/11, Washington put in place highly intrusive measures aimed at tracking money going to terrorists. It has inflicted harsh punishments on banks that did not adhere to all U.S. sanctions. It has imposed sanctions on Iran, Venezuela, North Korea, Cuba and other countries often simply to satisfy domestic critics who wanted to “do something” without paying much of a price. This type of economic warfare has failed to change the regimes in these countries but has caused widespread misery for ordinary people in them. Sanctions against Russia are aimed at policy change, not regime change, and therefore could be more effective.
Economic sanctions increased sharply during the Trump administration, which unilaterally withdrew from the Iran nuclear deal and then threatened to impose sanctions on any firms that traded with Iran — even though Tehran had adhered to the agreement, which took place under a U.N. framework. And then there are the fines pursued domestically by American regulators and judges, such as the almost $9 billion penalty against the French bank BNP Paribas in 2014. Again, such measures work only because of the power of the dollar.
I support the sanctions against Russia, but President Biden needs to make a speech explaining them. He needs to make clear that the Russian invasion of Ukraine marks the most serious assault on the rules-based international system in decades. If it succeeds, it could tear that system apart. That is why Washington has worked with its allies to impose these extraordinary measures. The president needs to detail the legal basis for the actions taken by the United States and its allies.
How exactly can governments seize privately owned property for which the owner, even if he is a Russian oligarch, has clear legal title? How can people be sure these powers will not be abused? Biden needs to emphasize that the United States will only take such measures in the future when there are blatant violations of international law, on the scale of Russia’s actions.
The dollar maintains its crucial role in the international system because the United States has the world’s largest economy. It also has the most liquid debt markets, its currency floats freely, and, crucially, it is regarded as a country based on the rule of law and not one prone to arbitrary and unilateral actions. That last criterion is not one that Washington has lived up to in recent years. Biden should make sure that, in fighting this battle against Russia, he does not erode America’s unique financial superpower.