The implementation of crippling sanctions on Russia’s central bank may encourage other countries to diversify away from the dollar, lest they fall victim to the same pressure tactics in the future. Gita Gopinath, the IMF’s first deputy managing director, suggests there could be “fragmentation,” of the world currency market. Johnathan Wheatley and Colby Smith report for the Financial Times:
Gita Gopinath, the IMF’s first deputy managing director, said the sweeping measures imposed by western countries following Russia’s invasion, including restrictions on its central bank, could encourage the emergence of small currency blocs based on trade between separate groups of countries.
“The dollar would remain the major global currency even in that landscape but fragmentation at a smaller level is certainly quite possible,” she said in an interview with the Financial Times. “We are already seeing that with some countries renegotiating the currency in which they get paid for trade.”
Russia has sought for years to reduce its dependence on the dollar, a campaign that accelerated in earnest after the US imposed sanctions in retaliation to its annexation of Crimea in 2014.
Despite those efforts, Russia still had roughly a fifth of its foreign reserves in dollar-denominated assets just before the invasion, with a notable chunk held overseas in Germany, France, the UK and Japan. Those countries have now banded together to isolate Moscow from the global financial system.
Gopinath said the greater use of other currencies in global trade would lead to further diversification of the reserve assets held by national central banks.
“Countries tend to accumulate reserves in the currencies with which they trade with the rest of the world, and in which they borrow from the rest of the world, so you might see some slow-moving trends towards other currencies playing a bigger role [in reserve assets],” she said.
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