Helio Beltrão: Atomic sanctions put dollar standard under pressure

Sanctions against Russia, in particular the confiscation of international reserves and the banning of the international financial system, are expected to lead to a gradual “de-dollarization” of the international financial system and the decline of the dollar standard.

As I mentioned in the last column, the violation of sovereign immunity from international reserves by the G7 countries is an unprecedented atomic sanction against countries with significant economies.

International reserves are held by central banks and constitute the “foreign money” that guarantees and guarantees the country’s “internal money”, the rubles, in the case of Russia. Hence, the traditional doctrine of central bankers since the 17th century is that reserves should be made up of the safest and most liquid assets possible. Without the backing of the reserves, the national currency plummets against strong currencies and suffers uncontrolled inflation, like mere pieces of paper in the wind, without an anchor.

Since 1944, the international financial system is based on the dollar, present in about 90% of foreign exchange transactions in the world and in 60% of international reserves. Dollar reserves are usually made up of US Treasuries, considered as good as cash…or so it was believed.

Furthermore, the New York-based financial system mediates most of the world’s international trade and financial transactions, even between third countries. By blocking access to the financial system, trade in the sanctioned country virtually ceases.

In one fell swoop, the G7 blocked the reserves in euros, dollars, Swiss francs, pounds, of the world pariah, Russia. It is an important measure to deter Putin, but it generates serious collateral damage.

Assets that were thought to be safe have evaporated. The world has discovered that the international financial system is not neutral, respectful of sovereign immunity and property, but subject to geopolitical considerations. There has been a rupture between ownership of the property on the one hand and its custody on the other. Whoever controls the custody and the financial means is the ultimate owner. American geopolitics, through its control of the financial system, can determine at every moment who deserves to continue to hold the title of owner. It is a discovery with dramatic consequences.

Some might think that only world outcasts should fear confiscations. Not quite. Since 9/11, the US has turned its “exorbitant privilege” — as Giscard D’Estaing called the dollar standard — into a long-armed weapon that extends its law and political will against countless countries in defiance of international law.

Last month, Biden signed a presidential decree confirming the confiscation of Afghanistan’s international reserves, which will be used to compensate victims of 9/11 and for humanitarian aid, at the discretion of the US government.

In 2018, European governments reacted with horror when the US unilaterally withdrew from the multinational nuclear deal with Iran and threatened to ban companies from European countries that did business with Iran from the financial system, despite complying with the agreement.

It is therefore rational for China’s central bank, which holds nearly $2 trillion in US Treasuries, to sell part of the bonds in exchange for assets that are not third-party liabilities. Gold and commodities can benefit. The Central Bank of Brazil itself should reflect on whether it makes sense to keep reserves of US$ 360 billion stationed in dollars or euros, since they can be a “point of pressure” for geopolitical or commercial interests by the United States.

Regrettably, China and the yuan tend to benefit from “de-dollarization” stemming from the use of nuclear financial weapons.