The U.S. dollar’s dominance in global markets will end soon as the West fails to weaken the Russian economy and the Chinese yuan gains more popularity, said Russian banker Andrei Kostin.
“The long historical era of the dominance of the American dollar is coming to an end,” Kostin, the CEO of Russian bank VTB, said last week.
According to Kostin, the Ukraine crisis has prompted a shift in the global economy. He said the current geopolitical tension is more severe than the Cold War, with the West freezing Russian sovereign assets to weaken its financial system. Kostin explained that the sanctions caused many countries to seek alternative currencies.
Kostin argued that the Western sanctions on Russia would not weaken its economy. The International Monetary Fund said Russian gross domestic product (GDP) would grow by 0.7 percent this year. Before, it estimated the GDP to grow by 0.3 percent.
Kostin explained that the Russian economy had adapted to the changes resulting from the sanctions, though the VTB executive predicted that Western sanctions would intensify.
He also predicted that China would remove its currency restrictions. The banker said China had realized that it could not be the world’s No. 1 economic power if the yuan remained as a non-convertible currency. The People’s Bank of China currently fixes the yuan’s rate every day to control its value. The central bank only allows the currency to fluctuate by two percent of the fixed range.
China has formed agreements with major trade partners, including Brazil, to use the yuan as a settlement currency instead of the U.S. dollar. Members of the Association of Southeast Asian Nations have also agreed to use domestic currencies for regional trade.
Other experts also shared a similar opinion with Kostin about the decline in the dollar’s power. Earlier this month, JPMorgan published a note to discuss emerging signs of de-dollarization. Analysts at the American bank said the dollar’s share in global forex reserves had hit a record low of 58 percent.
Asset manager Eurizon said the Ukraine War had accelerated the de-dollarization in global markets. Eurizon analysts asserted that most countries would still use the U.S. dollar for cross-border transactions.
U.S.-based credit rating firm Fitch Solutions also projected that the dollar’s dominance would decline over time. Experts at Fitch Solutions said there would not be a “paradigm shift” in international markets on the greenback’s utility. They explained that the dollar does not have an equal alternative.
De-dollarization to not directly affect U.S. financial ecosystem
Some industry players have raised concerns that the declining influence of the dollar would slow the U.S. economy. Boston University economist Perry Mehrling said foreign banks would experience de-dollarization in their balance sheets. He added that the foreign banks’ situation would not have a direct impact on U.S. finance.
Bob Stark, a market strategist at Kyriba, said volatility in other economies could reduce foreign investment in U.S. markets. He, nonetheless, argued that the U.S. could find other capital sources.
It should also be noted that despite the rise of the dollar’s rivals, it is not easy to replicate the ecosystem that supports the U.S. currency. According to U.S. Treasury Secretary Janet Yellen in April, the U.S. has “very deep” capital markets and regulations to support its use in global transactions. She said there is no institutional infrastructure comparable with the U.S. economic ecosystem.
Other experts have also argued that China’s capital control is a primary barrier to the yuan’s global use.