#19 De-Dollarisation in Motion
Washington is fighting across military, energy and financial fronts. The cost is beginning to appear where it matters most. In February 2022, Russia discovered that a foreign-exchange reserve is only as sovereign as the system holding it. For years, Moscow had accumulated hundreds of billions of dollars in reserves, partly as protection against financial pressure from the West. When Russian forces entered Ukraine, the United States and its allies froze a large portion of those assets.
For central banks elsewhere, the freezing of those reserves established a precedent that extended beyond Russia. A country could spend decades earning foreign currency, running trade surpluses and accumulating reserves, only to discover during a geopolitical confrontation that access to part of those savings depended upon decisions made in Washington, Brussels and other Western capitals.
For China, Saudi Arabia and other large reserve holders, the episode made the political conditions attached to foreign reserves considerably harder to ignore. Central banks continued accumulating gold while governments experimented with local-currency trade and payment systems requiring less Western financial infrastructure. Freezing Russia’s reserves demonstrated the reach of American financial power while giving other governments a reason to reduce their exposure to it. Four years later, Washington is applying the same financial leverage more aggressively against Iran. Scott Bessent is threatening to exclude institutions financing Tehran from the dollar system while America fights a Middle Eastern war, searches for petroleum in Venezuela and watches Japanese bond yields climb towards levels unseen for decades. At home, strategic reserves are being consumed while Treasury yields remain stubbornly high. There is nothing unusual about finding a separate explanation for each event. The pattern becomes harder to dismiss when they begin occurring at the same time.
Over the past few weeks, we have followed several of these pressures separately. What is becoming clearer is how quickly they are beginning to collide. This is what de-dollarisation looks like in motion.
