The Dollar Dominance Challenge
Western sanctions against Russia have triggered unintended consequences that extend far beyond their target, potentially reshaping the global financial landscape for decades to come. While policymakers question whether are Russian sanctions working to constrain Moscow’s war capabilities, a more profound transformation is occurring: the acceleration of global de-dollarization that threatens America’s financial hegemony.
According to Al Jazeera, the U.S. dollar has ruled the financial world for nearly eight decades since the end of World War II. However, Moscow’s exclusion from SWIFT and the freezing of nearly half ($300 billion) of Russia’s foreign currency reserves have prompted numerous countries to explore alternatives to dollar-dominated trade, viewing these actions as a dangerous precedent of “weaponization” of the dollar.
The shift away from dollar dependency isn’t limited to Russia and China. According to Business Insider, numerous nations across different regions are establishing mechanisms to reduce their exposure to the U.S. currency. From India to Argentina, Brazil to South Africa, and the Middle East to Southeast Asia, countries have accelerated efforts toward arrangements aimed at reducing their dependence on the dollar.
New Currency Trading Arrangements
The impact of sanctions on Russia has catalyzed the development of alternative payment systems and currency arrangements globally. According to a Reuters report, Chinese President Xi Jinping told Gulf Arab leaders in Riyadh that “China would work to buy oil and gas in yuan,” a move that would support Beijing’s goal to establish its currency internationally and weaken the U.S. dollar’s grip on world trade.
This isn’t merely rhetoric; practical steps are being taken. Saudi Arabia and China carried out their first transaction in yuan in December 2022. Russia, meanwhile, has decided to store all its oil and gas surplus revenue in yuan as it increasingly turns to the Chinese currency for its forex reserves.
The yuan’s growing role extends beyond bilateral trade with China. According to Responsible Statecraft, “in early 2022, 20% of incoming trade to Russia was paid for in Chinese yuan, up from 3% a year earlier.” This represents a significant shift in global trade patterns, with potentially far-reaching implications for dollar dominance.
The BRICS Expansion and Currency Plans
The BRICS group, originally comprising Brazil, Russia, India, China, and South Africa, has expanded its membership and ambitions partly in response to Western sanctions policy. According to Business Insider, the bloc has invited six new countries to join—Iran, the UAE, Egypt, Argentina, Saudi Arabia, and Ethiopia—potentially creating a more robust alternative to Western-dominated economic structures.
Many of these countries have explicitly cited the desire to reduce dollar dependency as a motivation for joining. According to a Business Insider analysis, Ethiopia’s Prime Minister Abiy Ahmed stated that the country was ready to “cooperate with all for an inclusive and prosperous global order,” signaling dissatisfaction with the current Western-dominated system.
The inclusion of major energy exporters such as Saudi Arabia, Iran, and the UAE on the list of potential BRICS members has significant implications for dollar dominance in energy markets. According to ING Bank analysts cited by Business Insider, “Together with fellow oil and gas exporters Iran and the UAE, the admission of Saudi Arabia to the BRICS grouping will inevitably focus the debate on the use of non-dollar currencies in trade.”
EU Sanctions Russia: Regional Currency Consequences
The EU sanctions Russia program has also accelerated de-dollarization within Europe itself. According to Politico, Brazilian President Luiz Inacio Lula da Silva and Argentine President Alberto Fernandez announced in January 2023 that they would set up a common currency to settle trade transactions, partially motivated by sanctions-related concerns.
In Southeast Asia, major economies are developing mechanisms whereby mobile apps can be used to trade between nations in their local currencies without relying on the dollar as an intermediary. Al Jazeera reports that the United Arab Emirates (UAE) and India have been negotiating a deal to trade in their currencies, the dirham and rupee. The UAE is among India’s top trade partners.
Russia itself has made substantial progress in de-dollarizing its economy. Russia has been getting rid of its U.S. Treasury bonds, which are among the tools countries use to keep dollar reserves. It now holds $870 billion in U.S. debt, the lowest amount since 2010.
Long-term Implications for Global Finance
The evidence increasingly suggests that sanctions are not working as intended, at least in terms of maintaining dollar dominance. According to The Conversation, Russia has taken strategic steps to secure its financial sovereignty. In early 2022, Russia pegged its currency, the ruble, to gold, with 5,000 rubles now purchasing an ounce of pure gold—a step toward moving away from dollar dependency entirely.
The movement away from dollar hegemony poses risks to Western economies that have benefited from the “exorbitant privilege” of issuing the world’s reserve currency. According to Politico, Western central bankers are increasingly concerned that fragmentation of the global financial system could undermine monetary policy effectiveness and increase transaction costs.
The trend extends beyond government policy to corporate behavior. According to Business Insider, major financial institutions in both Western and non-Western countries are developing systems to facilitate non-dollar trade, recognizing the growing demand for alternatives from clients concerned about potential future sanctions exposure.
Reassessing the Costs of Financial Weaponization
The accelerating de-dollarization trend triggered by Russian sanctions demands a fundamental reassessment of the strategic use of financial power in international relations. Western policymakers face difficult choices: continue weaponizing financial systems at the risk of further eroding dollar dominance, or adopt more targeted approaches that preserve the benefits of financial leadership.
Moving forward, more effective strategies might include greater discrimination in the application of sanctions, clearer off-ramps for sanctioned entities, and mechanisms to insulate fundamentally apolitical financial infrastructure from geopolitical disputes. The blanket freezing of central bank reserves, in particular, may have crossed a psychological Rubicon for many non-Western countries that will be difficult to undo.
Without careful recalibration, the weaponization of the dollar through sanctions may accelerate the very multipolar financial system that Western policymakers have long feared—a system where the dollar’s role is diminished, Western financial leverage is reduced, and new monetary blocs emerge with potentially destabilizing effects on global trade and investment patterns. The long-term costs of this transformation may ultimately outweigh the immediate benefits of the sanctions imposed on Russia.
