The war foreshadows the end of US geopolitical dominance
Published in Finans.dk on March 15, 2022 by David Bakkegaard Karsbøl, CIO in Selected Group
The war in Ukraine is economically insignificant when viewed in isolation, because the country is so poor and the raw materials and semi-finished products it provides can be obtained elsewhere. But the geopolitical implications of the war and sanctions are significant.
Although the US and the EU have many and serious foreign policy failures to their credit, it is still better for the world that the West as a whole wields geopolitical power than China, Russia and other authoritarian regimes. Unfortunately, we risk concentrating more power in the hands of authoritarian and commodity-producing regimes as a result of sanctions.
In economic terms, the United States has had a major advantage that the other major countries and regions have not had since the Second World War - namely that the US dollar is used to a very large extent as a reserve currency in all the world's central banks and as a key means of payment in very large parts of the global financial sector.
When a central bank prints new money, the country's treasury can use the money to finance government spending. The expansion of the money supply causes inflation, but it also leads to a redistribution from consumers to the government (also known as an inflation tax).
The case of the United States is special because of the dollar's status as a global reserve currency. As the dollar is used by many other countries and populations, the inflation (inflation tax) is also distributed to them, without them benefiting from the printed dollars. The fact that 80% of all international trade is settled via USD-denominated transactions has therefore been a boon for the Americans and has helped to underpin US dominance on the geopolitical stage.
The dollar's prominence has long been a thorn in the side of America's strategic adversaries, Russia, China and Iran and other authoritarian and commodity-producing countries. This is why they have already taken the first steps several years ago towards being able to settle commodity trade in roubles or yuan or other currencies (anything other than dollars and euros).
The disconnection of large parts of the Russian financial sector from the Swift payment system (Iran has long been kicked out) in response to the invasion of Ukraine will push Russian financial institutions to use the - so far - modest Chinese alternative, CIPS, which Iran has been forced into.
We risk that the sanctions against Russia and the exclusion of its major institutions from SWIFT will strengthen the alliance between authoritarian and commodity-producing countries. If you value low commodity prices and Western dominance in global geopolitics, this is not good news.
The coordinated Western boycott of Russian-produced oil risks further accelerating this trend, because the oil will be sold - just to non-Western buyers and at lower prices. If India is tempted, countries with a combined population of three billion could end up trading with each other outside the dollar and outside SWIFT.
And it's not just energy that's at stake. For decades, China's strategic goal has been to dominate the global extraction of so-called rare metals, and unfortunately it has largely achieved this goal. It is not itself a significant producer of the commodity, but Chinese ownership of mines across the globe is widespread.
In short, we should fear that the authoritarian and commodity-producing countries under China's leadership will work even more closely together against a Western agenda, and it is therefore more important than ever that our leaders are not naïve and short-sighted in their decisions. The Chinese economy and military capabilities will soon match those of the United States, and this will pose an increasing problem for the West in the years to come.
