Following World War II, America’s glitter was Coca-Cola, jeans, hamburgers, rock and roll, Hollywood and muscle cars. However, the dollar was the principal vehicle through which the United States celebrated its status as a superpower, economically and militarily. That vehicle is now sputtering.
The global decline of the dollar was accelerated by the war in Ukraine. Intended to punish Russia, the Western world’s removal of Russia from the SWIFT interbank network is having a domino effect.
Established in Belgium in 1973, the Society for Worldwide Interbank Financial Telecommunications (SWIFT) is used by 11,000 banks and financial institutions worldwide, handling about 42 million financial messages daily.
Sen. Robert Menendez, D-New Jersey and chair of the Foreign Relations Committee, introduced the SWIFT bill. Banks such as JP Morgan Chase and Citigroup argued that the ban, which had worked on Iran a decade earlier, could result in developing an alternative to SWIFT, which would harm American interests and its standing in the world.
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Sen. Marco Rubio, R-Florida, argued that sanctions would derail the dollar — even though he voted in favor of Russia’s removal from SWIFT: “We won’t have to talk about sanctions in 5 years because there will be so many countries transacting business in currencies other than the dollar that we won’t have the ability to sanction them,” he said.
Sanctions have shrunk but not collapsed Russia’s economy while it continues to wage war. Why has the Russian economy not collapsed? Partly because in 2014, the United States had threatened to ban Russia from SWIFT after its conquest of Crimea. As a result, Russia was ready with the System for Transfer of Financial Messages, which is now being used as a substitute for SWIFT. The West’s economic coup de grace failed.
The lesson Russia learned has not been lost on the non-Western world. Several countries have viewed the ejection from SWIFT with apprehension. This is now the second time an adversary of the United States has been ejected from the inter-banking system. Iran was banned a decade ago as a result of its nuclear ambitions.
Sanctions have, indeed, produced unintended results. The BRICS group of countries (Brazil, Russia, China, India and South Africa) aspire to form a currency union that no longer depends on the U.S. dollar. Several countries are exploring joining BRICS, including Saudi Arabia, Egypt, Algeria, Bahrain, Argentina, Indonesia, UAE, Uruguay and Bangladesh. At BRICS’ next meeting in South Africa in August, a discussion of a new currency will top the agenda.
During a state visit to Beijing, Brazil’s Luiz Inácio Lula da Silva and China’s Xi Jinping agreed to ditch the dollar in favor of the Chinese yuan and Brazilian real for trade, echoing a similar agreement between Russia and China. Even France, a darling of the European Union, has agreed to receive payment in yuan for exported goods to China.
Monetary hegemony does not end with a stroke of a pen. Historically, currencies followed the rise and fall of empires. Dominant global currencies can be dethroned. The dollar replaced the British pound — the prevailing currency between 1871, when Great Britain adopted the gold standard, and World War I. An alternative currency to the U.S. dollar is emerging worldwide, especially among countries that resent American hegemony. Whether it will be the Chinese yuan or another currency is not known.
De-dollarization poses a serious liability for the American economy. The dollar’s value could sink, and the cost of imported goods would rise, resulting in high inflation and unemployment. Symbolically, it would signal that America’s global glitter is dimming.
Did America respond impulsively to Russia’s aggression? The administration excluded exploring a diplomatic solution before the invasion or during the initial phase of the war. Instead, it opted to move forward with a bold dual-track strategy: sanctions on Russia and massive military aid to Ukraine.
The bill for military aid is more than $100 billion and climbing. Russia has not been rolled back from the territories it conquered; tens of thousands have died; several million Ukrainians were displaced; much of the country’s infrastructure has turned into rubble, with no end in sight.
We watch the Ukraine tragedy daily. Less visibly, the SWIFT decision has injected steroids into a de-dollarization process that may not have been realized for many decades, if at all.
Washington is scoring some battle victories in Ukraine, but its short-term thinking could backfire. In the future, Coca-Cola, jeans, hamburgers, rock and roll, Hollywood and muscle cars might be seen for what they are: mere symbols.
Yehuda Lukacs is associate professor emeritus of global affairs at George Mason University.