Martin Wirkus | Europe and Eurasia Fellow
Image credit: Adam Nir via Unsplash.
With Ukraine in desperate need, the United States (US) Congress is considering an aid package that includes the appropriation of Russian reserve assets. However, the prospective seizure of Russian assets is fraught with controversy. Western officials have proposed the moral case of supporting Ukraine with seizing these Russian assets, yet critics note that this infringes on sovereign property rights. Set to the backdrop of mounting international scrutiny over the Western-dominated monetary system, this move will likely accelerate the trend of de-dollarisation, threatening US economic power and emboldening geopolitical opponents in Europe and beyond. While alternative reserve currencies are being considered by these states, they must first collaborate to establish a fairer and more stable global monetary framework to avoid conflict or collapse.
Escalating sanctions regime and Russian regional influence
The global adoption of the US Dollar confers the US an "enormous privilege" which is regarded as a cornerstone of American economic hegemony. However, this global adoption is not a guarantee. Since the invasion of Ukraine in February 2022, Russia has become the most sanctioned country in the world: totalling more than Iran, North Korea, and Syria combined. The most impactful of these sanctions include the freezing of Russian Central Bank assets amounting to $300B USD. This expanding sanctions regime has harnessed US and western allies’ control over the monetary system to target not only Russia, but neutral countries like China and its semiconductor industry.
However, these sanctions have the potential to backfire as countries are incentivised to reduce their adoption of the US dollar, thereby de-risking themselves from potential US sanctions. In recent years, Russia and China have shifted away from the US dollar by substantially increasing their strategic accumulation of gold reserves and selling their US treasuries and bonds. Though they cannot dispense with all their reserves, this move away from the USD is beneficial for Russia’s geostrategic interests in Europe. A weakened USD means easier competition for Russia, as the US serves as the backstop for European security – including Ukraine.
However, the confiscation of the frozen Russian central bank assets is a major escalation in the usage of economic coercion. Infringing on sovereign property rights of Russia may undermine the integrity of the rules based international order. Neutral, competitor, and non-aligned states, may see this as a sign to start diversifying their reserve holdings and means of trade. This trend is already underway with even US partners such as Korea and Indonesia agreeing to trade in each other’s currencies. These trends signify a shift towards a more multipolar monetary system, where countries seek non-USD methods of payment. As global geopolitical tensions rise, countries are increasingly wary of the risks associated with holding US dollar reserves. This trend, as well as rising geopolitical tensions elsewhere across Europe threaten the future of the US dollar as the world's primary reserve currency and thereby present an opening for expanded Russian influence in Europe.
What does this mean for US power and Russia?
The diminishing reliance on the dollar not only undermines the US’ global position but also presents a potentially existential risk to European security. The US government, which is currently borrowing 1 trillion dollars every 100 days, relies on buyers to buy its debt in the form of treasury bonds. However, as foreign countries like Russia seek to reduce their exposure to US dollars due to the risk of sanctions, the demand for US debt will decrease. This will force the US Federal Reserve to become the ‘lender of last resort’ to replace this demand and avoid defaulting on external debts. The subsequent monetary debasement and inflation will endanger the US’ capacity to counterbalance Russia in the region. This is already prevalent among states in Eurasia with which Russia has historical ties. Countries like Azerbaijan, Uzbekistan and Kazakhstan are staying well within the Russian orbit and significantly increasing purchases of gold reserves.
Russia’s reaction to seizure
Russia maintains that the seizure of its sovereign assets violates international law. Whilst there are historical precedents for asset seizures in response to aggression, they often occurred during open warfare or with international authorization through the UN. Confiscating assets without being directly involved in the conflict sets a destabilising precedent and blurs the line between war and peace. Furthermore, the Kremlin has stated that it has a list of foreign assets valued at $288B USD that it will seize in a tit-for-tat response if the West takes similar actions against Russia's frozen assets.
Near-sighted thinking
As the Ukrainian crisis continues, the proposal to seize Russian reserve assets presents a critical dilemma for the US in the current international order. While framed as a measure to support Ukraine, this move carries significant repercussions, intensifying the ongoing trend of de-dollarisation and eroding confidence in the US-dominated monetary system. The burgeoning shift towards alternative reserve currencies underscores a transition towards a multipolar monetary framework, with profound implications for the US economy and European security. A collaborative effort is needed to forge a more equitable and resilient global monetary architecture, lest the spectre of conflict looms larger on the horizon.
Martin Wirkus is the Europe and Eurasia Fellow for Young Australians in International Affairs. He is excited about exploring the emerging security challenges in Central and East Asian countries, along with delving into the political, economic, and social issues that define this diverse region.