Sanctions on Russia put dollar rule at risk

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Rachel Evans New York

 

US AND EU sanctions against Russia could hasten a move away from the dollar that has been stirring since the global financial crisis.

One place the shift has become evident is Hong Kong, where dollar selling has led the central bank to buy more than $9.5 billion (R102bn) since July 1 to prevent its currency from rallying as the sanctions stoked speculation of an influx of Russian cash.

MegaFon, Russia’s second-largest cellular operator, shifted some cash holdings into the Hong Kong dollar. Trading of the Chinese yuan versus the Russian rouble rose on July 31 tto the highest volumes since the end of 2010, according to the Moscow Exchange.

While no one is suggesting the dollar will lose its status as the main currency of business any time soon, its dominance is ebbing. The greenback’s share of global reserves has already shrunk to under 61 percent from more than 72 percent in 2001. The drumbeat has only become louder since the financial crisis in 2008, an event that began in the US when subprime mortgage loans soured.

The largest emerging-market nations, including Russia, have vowed to conduct more business in their currencies.

“The crisis created a rethink of the dollar-denominated world that we live in,” said Joseph Quinlan, the chief market strategist at Bank of America’s US Trust. “This nasty turn between Russia and the West related to sanctions can be an accelerator toward a more multicurrency world.”

Such a transformation could take as long as 25 years, with the dollar remaining “top of the heap” even as other currencies played a greater role, he said.

 

The US and EU announced further curbs on trade with Russia on July 29 over its support of insurgents in Ukraine. The additional sanctions limit state-owned banks’ access to European and US capital markets. Europe also imposed an embargo on weapons sales while the US added a shipbuilder to a list of blocked defence-technology entities.

MegaFon, a Moscow-based company that has not been targeted by the sanctions, was moving funds into the Hong Kong dollar, chief financial officer Gevork Vermishyan said last week. Billionaire Alisher Usmanov’s wireless operator has traditionally kept its foreign cash in dollars and euros, according to the company.

Norilsk Nickel, the largest producer of nickel and palladium, was also keeping some of its cash in the Asian currency, people with knowledge of the situation said last week, asking not to be identified because the information is not public.

In addition, Danilo Lacmanovic, the chief executive of Moscow-based wealth manager Third Rome, said rich Russians were looking to move funds to banks in Hong Kong, Singapore and Dubai.

 

Since the US currency replaced gold as the bedrock of the financial system after World War II, the greenback has weathered numerous crises. It emerged from the collapse of the Bretton Woods exchange rate system in 1971, endured the introduction of the euro almost three decades later and maintained its status as a haven currency even when the 2008 collapse spread from Wall Street to economies around the world.

The US Federal Reserve’s unprecedented monetary stimulus to stem that crisis channelled cash into the real economy through debt purchases, leading nations including Brazil and Germany to claim the US was debasing its currency. The crunch increased interest in tenders divorced from a single nation’s strength, spurring the International Monetary Fund to boost almost 10-fold the allocation of special drawing rights, a reserve asset whose value is based on a basket of currencies, and fuelling demand for so-called virtual currencies, such as bitcoin.

A $9bn fine imposed on BNP Paribas, France’s largest bank, by US regulators in June has also made some institutions wary of the penalties that dealing in dollars can bring, according to Steven Englander, the head of Group of 10 currency strategy at Citigroup.

BNP Paribas was also banned from clearing certain dollar-denominated commodity trades for a year after the lender admitted to violating US restrictions on doing business with Iran, Sudan and Cuba.

“You

used to think that you had to worry about the Fed and about the supply of dollars and the monetary-policy reaction function, and now you have to worry about potentially sanctions and other kind of regulatory liabilities, so it’s baggage,” Englander said.

“If you see yourself on the receiving end in some geopolitical dispute with the US, holding liquid dollar assets is risky.”

Sanctions showed the potential for an increasing reliance on economic measures – such as restricting the use of a currency – as “an alternative to military” action, said Marc Chandler, the chief currency strategist at Brown Brothers Harriman. “This represents a big step in the evolution of US foreign policy toward Russia. The real challenge is converting that financial power into political influence.” – Bloomberg


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