Russian sanctions act as a “nuclear weapon” on global finance

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The West’s sanctions shootout against Russia after its invasion of Ukraine has been compared to the detonation of a “nuclear weapon” by a prominent economist.

Speaking at an investment summit in London, Dr Mohamed El Erian, chief economic adviser at Allianz, said “most national security officials I know have not realized how much how powerful the disruption of a payment system could be”.

Unlike trade sanctions, global payment networks do not have an organization such as the World Trade Organization acting as a mediator and regulator. It is this regulatory absence that worries Dr. El Erian.

“We entered a world where we weaponized something without all the infrastructure that comes with weaponizing something so powerful.”

He does not envision an immediate collapse of the existing dollar-based world economic order, but he foresees a “much more fragmented system” in the future, with countries that do not fully embrace the Western worldview feeling vulnerable. by the militarization of the payment system.

Nouriel Roubini, chief economist at Atlas Capital Team, says Russian sanctions have irreversibly deepened an already emerging global economic fissure and countries with a foot in both camps will soon have to choose a side.

“I think there is going to be a process where these countries will try to decouple from the US dollar as a reserve currency and from the dollar planning system,” Roubini said.

Like Dr El Erian, Mr Roubini does not believe the process “will happen overnight”, but that countries are now looking for viable alternatives to dollar assets such as gold.

new chinese order

China’s ambitions to form a counterweight to the West and its concerns about Washington’s weaponization of finance mean it is at the forefront of this dollar divestment.

Roubini said President Xi Jinping may even seek to persuade Saudi Arabia to price oil and make payments in Chinese yuan, as well as increase its reserves of official Chinese currency.

He sees in these maneuvers the beginning of the establishment of a “bipolar world in which there will be two zones of influence separated from each other”.

“There will be a separate trading system, a separate monetary system, a separate financial system,” he said.

“One area is going to be around the United States, Europe and their own allies. Another will be around China, Russia, North Korea, Iran, Pakistan and many markets sympathetic emergents.

Executive Chairman of Investcorp - Dr. Mohamed El Erian.  Courtesy of Investcorp

Bob Browder, managing director of Hermitage Capital Management, is less convinced that Western sanctions against Russia will have such a schismatic effect.

“I don’t think there is a way around the dollar, euro and pound system,” he said.

“Russia said we don’t need dollars, we’ll settle for Chinese currency or gold. But the reality is that almost all economic activity in the world is conducted with the United States, the European Union and Japan.

In this context, he sees sanctions against Russia as a very effective ploy.

“I think Russia will not be able to survive just with China, India, South Africa and Brazil,” he said.

He compared dollar-based hegemony to democracy, paraphrasing Winston Churchill’s famous quote in which the former British Prime Minister called democracy a “the worst form of government – except all the others that have been tried”.

Mr. Browder’s analogy is questionable given that many countries have shunned democracy and therefore might as well do the same with the US dollar.

money talks

The flaw was pointed out by Mr Roubini, who said many countries would be seduced by the Chinese offer.

“I remember I was at a conference a few years ago, and there was the president of an African country… and someone asked him, ‘Are you going to use the Chinese 5G system?’ He said, “Absolutely, it costs 50% less than the western version.”

The leader in question did not care how much influence Beijing would gain, suggesting that if it wasn’t China, it would be the United States.

IMF reform is needed

The task facing the West to prevent the obsolescence of the dollar in much of the world is daunting, but Dr. El Erian had some practical advice.

“You start with [International Monetary Fund] and the World Bank, you give developing countries a better voice and representation,” he said.

“You take away the feudal rule that the head of the IMF must be European and the head of the World Bank must be American.

“[You take] seriously what is going to happen in the developing world and put in place a framework for orderly restructuring.

“There are going to be a lot of depth restrictions and you need the cover of a multilateral system for that.”

UK-sanctioned oligarchs — in pictures

Updated: May 17, 2022, 03:00

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