War and sanctions accelerate deglobalization and put dollar in check

The war in Ukraine and weaponized sanctions on Russia on an unprecedented scale by the liberal democracies of the West are likely to accelerate the ongoing trend of declining global trade and financial integration.

Along the way, the supremacy of the dollar in international transactions and in the accumulation of reserves tends to lose ground, as has been the case for some years.

Between the 2008 global financial crisis and the start of the pandemic in 2019, world trade as a proportion of global GDP (Gross Domestic Product) shrank by 4.6 percentage points, according to the World Bank.

In the three years leading up to Covid-19, long-term foreign investment flows between countries had fallen by nearly 25% to $1.5 trillion, according to UNCTAD, the UN trade body.

For experts, sanctions against Russia tend to reinforce the retraction in global integration, encouraging countries potentially subject to this type of measure imposed by the United States and the European Union to move away from liberal democracies and to unite more.

In recent years, nations considered autocratic such as Russia, China, Turkey and Hungary (the last two with elected governments) have been tightening trade ties with analogous countries. Overall, the share of this “autocratic bloc” in global GDP and as a destination for foreign investment has increased significantly.

The Economist Intelligence Unit estimates that autocratic countries currently account for around 30% of global GDP, twice as much as before the end of the Soviet Union in 1991. Their exports grew significantly in the period and the value of companies listed on stock markets jumped from 3 % of the global total to about 30%.

At the same time, there are increasingly frequent experiences of countries using their own currencies in trade relations, something that Russia and China intend to intensify after the sanctions against Moscow.

Most of these economies have also been looking for alternatives to the dollar for the accumulation of reserves. Since the invasion of Crimea in 2014, Russia has intensified the movement and multiplied its holdings in gold and other assets.

At the end of 2021, the share of the US dollar in the reserves of global central banks reached the lowest level in more than two decades: 58%, compared to 71% at the turn of the 2000s, according to the IMF (International Monetary Fund).

The Fund’s Deputy Director, Gita Gopinath, said recently that while the dollar still dominates the global financial landscape, it has been replaced in many economies.

“We are already seeing this with some countries renegotiating the currency they are paid in for trade,” said Gopinath. “They also tend to accumulate reserves in the currencies they trade with the rest of the world. We see a trend towards other currencies playing a bigger role.”

The Fund estimates that up to a quarter of the decline in the dollar as the main currency for reserves can be explained by greater use of the Chinese yuan. Even so, although its share has tripled in five years, less than 3% of global reserves are denominated in Chinese currency.

In late March, autocratic Saudi Arabia announced its intention to sell oil to China (and accumulate reserves) in yuan — 25% of Chinese oil imports come from the Arab country.

In a letter to shareholders about the war and sanctions on Russia, Larry Fink, chief executive of BlackRock, the world’s largest investment fund, argued that “the Russian invasion of Ukraine put an end to the globalization we have experienced over the past three decades.” One consequence could be greater use of digital currencies — an area in which Chinese authorities have made strides.

As part of the effort to reduce dependence on US-controlled financial payment systems, China also launched, in 2015, the Cips (Cross-Border Interbank Payment System). Last year, the system moved US$ 7.1 trillion, aggregating 1,200 participants in more than 100 countries.

Although its transaction volume is increasing by about 20% a year, Cips is tiny compared to Swift (Society for Worldwide Interbank Financial Telecommunications), with 11,000 members worldwide — and from which Russian banks have been driven out since the invasion.

For former Central Bank President Arminio Fraga, the trade war between the US and China in the Donald Trump administration (2017-2021), the pandemic and Western sanctions against Russia are milestones that can accelerate structural changes in trade and financial relations. between countries.

“Recent events reinforce the idea that the end of history was nothing more than a dream”, says Fraga, referring to the best seller “The End of History and the Last Man” (1992), by Francis Fukuyama, in which the author proclaimed the definitive victory in the world of the liberal capitalist democratic model.

“The world is rethinking, for example, the entire inventory management model that had been taking place within an integrated international production chain and that had problems in recent years,” he says.

Many countries have already taken effective measures to reduce productive integration. The annual volume of foreign direct investment between the US and China, for example, has dropped from an average of US$30 billion five years ago to US$5 billion.

José Francisco de Lima Gonçalves, chief economist at bank Fator, believes that the autocratic Russia and China will strengthen ties from now on, with the Chinese buying up a good part of the participation of Russian companies (especially energy) that had US companies as partners. or European.

“It is possible that in the future we will have two large differentiated areas in the world, with a greater predominance of the yuan in the East and the dollar in the West”, says Gonçalves.

For José Julio Senna, economist and former director of the Central Bank, the pandemic and the sanctions on Russia reinforce the trend of deglobalization and the formation of regional and political partnerships that had already been taking shape.

“Between 1980 and 2008, while global GDP grew 3.6% a year, on average, international trade advanced 6%. From 2011 to 2019, GDP grew 3.6%; and trade, 3.7%” , it says.

Senna says that the recent announcement of billionaire programs to encourage industrial sectors by the US and Japanese governments is a symptom of the attempt to reduce external dependence in a scenario of loss of strength of globalization.

“On the other hand, countries with similar regimes tend to embrace each other. Especially because the autocracies do not want cultural influence and successful economic examples of liberal and democratic countries around”, says Senna.

For the economist at the Brazilian Institute of Economics at FGV, Armando Castelar, the war in Ukraine and Western sanctions on an unprecedented scale should accelerate changes that were already taking place in the global economic order.

“There will be a growing search for alternative international means of payment and for countries to become self-sufficient in more areas, weakening global chains. The Chinese, for example, are already madly investing in technology, as the emphasis on autonomy in this area will escalate”, says.