Russia’s invasion of Ukraine has cost Moscow a small amount by historical standards, per the Economist.
Russia’s spending remains opaque, but its war budget is about 3% of GDP.
By comparison, the Soviet Union spent 61% of GDP in World War II.
Russia’s invasion of Ukraine has come at a steep geopolitical price and tens of thousands of people have died, but a new analysis by the Economist suggests the country is actually spending a small amount on the war effort.
The direct fiscal cost of the war — spending on soldiers and machines — is estimated to be about 3% of Russia’s GDP, or roughly $67 billion a year, according to the report. That figure comes from a comparison of Moscow’s pre-invasion spending forecasts for defense and security with what it actually spent.
The anti-dollar drive spearheaded by Asia has spread to Europe, with France growing sour on the greenback’s dominance. Here are 6 rising threats to the buck’s supremacy of global trade.
The dollar’s supremacy in global trade faces fresh challenges as several countries float plans to use local currencies in commerce.
Russia and Iran are working to create a gold-backed stablecoin, while France has pursued a trade deal with China in yuan.
Here are 6 rising challenges to the greenback’s dominance of international trade and investment flows.
The dollar’s dominance of global trade and investment flows is facing a slew of new threats as more and more countries draft plans to boost the use of alternative currencies.
For some time now, nations from China and Russia to India and Brazil have been pushing for settling more trade in non-dollar units – with projects ranging from the use of local currencies to a gold-backed stablecoin and a new BRICS reserve currency.
Now, even Europe appears to be jumping on the anti-dollar bandwagon, with French president Emmanuel Macron recently warning against the continent’s dependence on the greenback.
With movements to undermine the dollar’s unipolar supremacy gathering momentum, it comes as no surprise that the buck’s status as a reserve currency eroded in 2022 at 10 times the pace seen in the past two decades, according to Eurizon SLJ Asset Management.
Strategists at the asset manager found that the greenback’s share of total global reserves fell to 47% last year, from 55% in 2021 and as much as two-thirds in 2003.
For decades, the US dollar has reigned supreme as the world’s reserve currency and is widely used in crossborder trade, especially for commodities such as oil. Thanks to its relative price stability, investors see it as a safe-haven asset in times of heightened economic and geopolitical uncertainty.
The dollar was further bolstered last year by a surge in US interest rates that made it attractive to foreign investors seeking higher yields. It surged 17% during the first nine months of 2022, but has since lost some of its shine on the prospect that the Federal Reserve may soon end its rate hikes as inflation cools rapidly.
Against this backdrop come the latest threats to the greenback’s reign — here are 6 currency projects from across the world that are ultimately aimed at undermining the dollar’s supremacy.
France calls for reduced dependence on the US dollar
In an interview with Politico, France’s Macron urged that Europe must reduce its dependence on the “extraterritoriality of the US dollar.”
The bombshell remarks came as the president stressed Europe should avoid getting tangled in tensions between China and the US. “If the tensions between the two superpowers heat up … we won’t have the time nor the resources to finance our strategic autonomy and we will become vassals,” he said.
His comments came quickly on the heels of a much-watched trade deal between French multi-energy conglomerate TotalEnergies and China’s national oil company CNOOC – the Asian nation’s first-ever liquefied natural gas transaction settled in the yuan.
China pushes for the yuan to replace the dollar in oil trades
The move seeks to chip away at the petrodollar regime in place since the 1970s, where global oil transactions are largely settled in dollars.
Toward the end of last year, Beijing began buying Moscow’s crude at steep discounts, completing those purchases in yuan rather than dollars, giving rise to the so-called petroyuan.
With a stronger greenback, oil contracts become more expensive because the deals are largely priced in the US currency, and this also explains China’s shift away from the dollar.
Kpler analyst Viktor Katona said Russia has effectively become “an Asian nation that in my opinion has introduced the yuan into large-scale oil trade.”
Billionaire investor Ray Dalio also chimed in on Beijing’s anti-dollar drive, saying global central banks are less willing to hold the dollar with China increasing global trade in yuan.
Malaysia, China weigh launching an Asian Monetary Fund
At the same time, Malaysia has launched talks with China on forming an Asian Monetary Fund in a bid to de-link from the dollar, according to Bloomberg.
“There is no reason for Malaysia to continue depending on the dollar,” the country’s prime minister Anwar Ibrahim said earlier this month. He added that Malaysia and China are already in talks to utilize the ringgit and renminbi for trade deals.
An Asian Monetary Fund was initially proposed in the 1990s, but the concept didn’t gain much traction.
“But now with the strength of the economies in China, Japan and others, I think we should discuss this — at least consider an Asian Monetary Fund, and, secondly, the use of our respective currencies,” Anwar said.
Russia and Iran eye a gold-backed stablecoin
Russia and Iran are working together on a cryptocurrency backed by gold — a ‘stablecoin’ that could replace the dollar for payments in international trade.
The two countries, both of which have been hit by Western sanctions, want to issue a “token of the Persian region” for use in crossborder transactions, with a plan to launch it in a special economic enclave in Astrakhan in southern Russia, which already handles Iranian shipments.
But the project can move forward only once Russia’s market for digital assets is fully regulated, according to a Moscow lawmaker.
Russia and Iran have stepped up their push to “de-dollarize” in recent months, according to think tank the Jamestown Foundation. They aim to increase their volume of trade to $10 billion per year via moves such as developing an alternative international payments system to SWIFT, which they are banned from.
Brazil and Argentina plan a common currency
Brazil and Argentina recently announced they are gearing up to launch a joint currency, named the “sur” (south), that could eventually become a euro-like project embraced by all of South America.
A common currency could help boost South American trade, the countries’ leaders said in a joint statement, because it evades conversion costs and exchange rate uncertainty. That could erode the dollar’s dominance in the region, given the greenback accounted for as much as 96% of the trade between North and South Americas from 1999 to 2019, according to the Federal Reserve.
UAE, India look at using rupees in non-oil trade
Meanwhile, the United Arab Emirates and India have floated the idea of conducting non-oil trade in rupees.
The move would build on a free trade agreement signed last year, which aims to boost trade excluding oil between the two countries to $100 billion by 2027.
China has also pondered on the idea of settling non-oil trade in local currencies that exclude the greenback, according to minister of state for foreign trade of the UAE Thani bin Ahmed Al Zeyoudi.
Russia, China propose a new reserve currency
Last year, Russia and China kickstarted talks to develop a new reserve currency with other BRICS countries in a challenge to the dollar’s dominance.
The new reserve unit would be based on a basket of currencies from the group’s members: Brazil, Russia, India, China, and South Africa.
The dollar’s reign as the chief reserve tender is already on the wane as central bankers diversify their holdings into currencies like the Chinese yuan, the Swedish krona and the South Korean won, according to the International Monetary Fund.
8/8 SLIDES
By historical standards, the current war pales in comparison. The Soviet Union during World War II, for example, spent about 61% of GDP, and the US at the same time put about 50% of its GDP toward the conflict.
Load Error
However, 3% is substantially higher than the 0.4% of GDP the Soviet Union spent on its war on Afghanistan.
One reason for the relatively low spending on Ukraine is political, as the government has repeatedly called the war a “special military operation,” which could preclude using an exorbitant percentage of the GDP.
There are also economic reasons. Printing additional cash to fund the war would push inflation higher and weigh on Russia’s citizens. Saddling banks with war debt could do the same, and both options in turn could harm Vladimir Putin’s political aims.
Plus, the technology underpinning armed forces today is more advanced than ever, which means militaries require fewer people and machines for a war effort.
To be sure, the war has resulted in widespread sanctions that have reshaped global oil flows and trade, and cut into Russia’s energy supremacy. Western nations have barred or boycotted Russian commodities, which has pushed Moscow to seek alternative destinations for its oil and other goods.
