The Russian threat to dollar hegemony is nothing but a fantasy
We are not witnessing the dawn of a new post-dollar world.
- Maximilian HessFellow at the Foreign Policy Research Institute
Published On 12 Apr 202212 Apr 2022
Western sanctions imposed on Russia in late February saw the rouble plummet to unprecedented lows, prompting Russia’s Central Bank to more than double interest rates to 20 percent and setting off fears Russia’s economy could collapse. Since then, the rouble has largely recovered, at least officially. Russia’s Central Bank even announced a link between the rouble and gold – and on April 8 it cut back the baseline interest rate from 20 percent to 17 percent.
Combined with discussions of a rouble-Indian rupee trade arrangement, and Russia’s expanded currency surplus on the back of high hydrocarbons prices, this has been trumpeted by Russian propaganda as evidence Moscow is not only withstanding the West’s economic war, but as the potential end of dollar dominance.
Moscow is not alone in making this argument and this line of thinking is not limited to its echo chambers on the far right and far left, either. Similar positions have been floated in the opinion pages of The Wall Street Journal and Australia’s Financial Review – even the renowned Credit Suisse analyst Zoltan Pozsar, in conversation with Bloomberg, argued that this may be a turning point to a new post-dollar world.
However, in reality, the current “strength” of the rouble and its supposed gold peg represent nothing but the weakness of Russia’s economy and its fiscal management in the face of Western sanctions.
First, it must be understood that the rouble’s strength, while not wholly illusory, is the result of an extreme decrease in trading levels, and the Russian government’s own capital controls. The rouble is not quite an inconvertible currency yet – Russia’s banks are not yet under a blanket ban – but almost all trading takes place on Russia’s MOEX exchange. Exporters are required to sell their foreign currency to the state.
Russia’s currency controls also mean that the rouble-gold peg is no return to the gold standard. A gold standard means that one can freely exchange a paper currency for gold. Russia’s gold peg, inversely, was to force Russian gold producers and sellers to accept a fixed amount of paper money for their gold production.
Therefore, the Russian “gold peg” should be seen as akin to the fixed price for cigars in Cuba rather than as any serious threat to the international financial order. Russia’s central bank abandoned the policy on April 7 anyway, though this has received considerably less attention from dollar doom-mongers and Kremlin propagandists.
In contrast to the fevered end-of-dollar-dominance commentary, no notable foreign investors have gone long the rouble, as the Kremlin’s own currency controls prevent them from repatriating gains. In countries neighbouring Russia, which have seen an influx of Moscow and Saint Petersburg’s intelligentsia in the aftermath of the war, the real rouble rate available at most cash counters is far lower than the official rate.
For now, Russia can sustain its illusion of rouble strength thanks to a strong current account surplus meaning it has hard currency to spend, even as it faces looming default and has seen most of its assets frozen. This will no longer be the case if Europe ultimately does agree to an oil and gas embargo.
The Russian state may also grow tired of effectively subsidising its importers and those seeking to take cash abroad, given Putin’s turn to autarky and lashing out against fifth columnists. The risks of a further rouble collapse are very real. Russia’s threat to dollar hegemony, however, remains a fantasy.
The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.
Fellow at the Foreign Policy Research Institute
Maximilian Hess is a Fellow at the Foreign Policy Research Institute and a Political Risk consultant based in London
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