When free India celebrated its 75th birthday with great pomp and splendor last month, western news agencies marveled at how the once-former colony had become a dominant world power after unshackling the bonds of servitude when the British finally left the country.
But, if escaping captivity is a rallying cry, it is time for India, with the world’s largest fintech workforce, and many other developing countries, to develop solutions so that their peoples are no longer subject to the weaponisation of the U.S. dollar.
In the six months since the Russia-Ukraine war started, there have been multiple high-level meetings between senior American and Indian officials. At each meeting, the US has firmly persuaded India to either join the western economic blockade against Russia or, at a minimum, condemn Russia.
The Indian officials have argued that India wants peace in Ukraine, but it wants to stay non-aligned, preferring to deal with Russia to obtain oil prices at a discount to help bring down its trade deficit. Energy is just one dimension in a complicated relationship India has with the Russians that has existed for over 70 years.
Dollar as a diplomatic weapon
There is nothing wrong with one country persuading another to act in its interests. But the US has repeatedly crossed the line by hinting at third-party economic sanctions against a sovereign nation that is not a party to the conflict.
The root of the US’s confidence is in the dollar’s importance in world commerce. Nearly 90 per cent of all cross-border trading is routed through the Fed even when a US entity is not involved. Consider the trade volume between Turkey and Russia reached $26 billion in 2019, most of it in Russian energy imports. Under the current system, at least until before Western sanctions crippled Russian banks, nearly all of this commerce was dollarised through the use of correspondent banks.
A Russian buyer of Turkish carpets instructs his local bank to search the SWIFT system to find a correspondent bank that works with the Turkish seller’s bank. A correspondent bank — such as Citibank or Deutsche Bank — is a safe third-party financial institution that acts as a go-between between buyer and seller to conduct cross-border payments and work primarily through SWIFT messaging.
All the correspondent banks have accounts at the Federal Reserve Bank. Rubles are converted to dollars, and the dollars are reconverted to Lira, with the entire transaction recorded at the Fed.
This fact gives the Treasury Department’s Office of Foreign Assets Controls (OFAC) enormous power to block fund transfers to countries, groups, or individuals subject to US sanctions. In a 2021 paper, the Treasury reported that 9,421 sanctions designations were active, a 933 per cent increase since 9/11, as the US administrations, both Republican and Democratic, have used dollarisation as a primary diplomatic weapon.
Each country that the US considers unworthy of membership in the global family of nations until they change their behaviour — Venezuela, Iran, Russia, North Korea, Iraq, Syria — is a target of the US sanctions. Even countries crucial to the US’s long-term geopolitical interests — India, Brazil, South Africa, and China — invite the US’s ire if these nations deal with sanctioned countries.
Dollar’s growing dominance
The US is like the world’s high school principal, forever watching for “unacceptable conduct” through a sizable front-office staff and ever-willing to impose penalties to bring violators in line. Many countries feel that a single country should not have the power to sanction other nations when the UN charter explicitly states that all nations are equal, yet, the world’s superpower continues to unleash its economic weapons to serve its foreign policy interests.
Their belief is that no sanctions regime should be on the books until the UN Security Council votes in favor of such action, an unlikely occurrence because of the veto power of the US and its close allies, the UK and France.
Some countries have already begun to challenge the dollar’s dominance. While digital currencies, alternative payment platforms to SWIFT, and new ways of hiding cross-border transactions that avoid the US’s scrutiny are all solutions, establishing barter-like national currency systems is the most potent threat yet to the dollar’s hegemony.
In 2019, Russia and Turkey inked a deal in which all trade between the two countries would be directly in Lira or Ruble, bypassing the dollar entirely. As China and Russia draw closer, monthly Yuan-Ruble volumes could reach 25 per cent of commerce between the two countries, up from 7 per cent in 2013 and 18 per cent in 2017, according to the Wall Street Journal.
And last month, Iran launched the rial-ruble trading platform in its foreign exchange market after the two countries had agreed on a $40 billion deal to step up oil and gas exploration. Countries of the Global South should invest in developing bilateral currency trading systems as a backup to American pressure. The collateral benefits of strengthening these countries’ sovereignty are sizable.