The Strategist

IMF: Sanctions against Russia may weaken dominance of US dollar

03/31/2022 - 09:29

Gita Gopinath, the International Monetary Fund's (IMF) First Deputy Managing Director, suggested that sanctions on Russia adopted in response to the military operation in Ukraine could erode the dollar's dominance.

"The dollar would remain the major global currency even in such a situation," Ms. Gopinath told the Financial Times, "but fragmentation at a lesser level is probably plausible."

Ms. Gopinath stated that restrictions, such as those imposed on Russia's Central Bank, may lead to the formation of small currency blocs within which individual countries will trade.

Switching to other currencies in global trade, she believes, will diversify reserve holdings of central banks around the world. According to her, different currencies are increasingly being used more actively in commerce.

Ms. Gopinath further stated that due to the rise of other currencies, the dollar's share of the market has fallen from 70% to 60% in the last 20 years. Even the Chinese yuan, she argued, will not be able to fully replace the dollar. According to the IMF, renminbi accounts for less than 3% of global bank reserves. "This is a long process that will take time, and the dollar's dominance will last for a long time," she warned.

Furthermore, the confrontation between Russia and Ukraine, according to Gita Gopinath, will hasten the adoption of digital currencies, ranging from cryptocurrencies to central bank digital currencies.