Russia, monetary policy, sanction, global financial system, dollar, reserve currency, currency, IMF International Monetary Fund, gdp gross domestic product, special drawing rights, China's trade, Triffin dilemma, multipolar system
Economic sanctions have frozen a large part of Russia's $630 billion in foreign reserves. Cutting Russia out of the global financial system raises questions about the future of the dollar as the reserve currency. Russia will likely strengthen its relations with China and could increasingly use the renminbi. Since 2014, China and Russia have severely reduced their dependence on the dollar for bilateral trade.
[...] Then the challenge of their distribution would arise. Currently, SDRs are distributed according to the size and openness of economies. This criteria favor rich countries. - The Renminbi's use as an invoice currency outside Asia remains very limited when compared to the size of China's trade. Most importantly, China's ?nancial markets are still inadequate in their technical characteristics and legal framework: neither the capital account nor ?nancial services are liberalized. Today, an acceleration of the liberalization of the financial market appears incompatible with the political regime. [...]
[...] Policy brief: The future of the dollar Economic sanctions have frozen a large part of Russia's $630 billion in foreign reserves. Cutting Russia out of the global financial system raises questions on the future of the dollar as the reserve currency. Russia will likely strengthen its relations with China and could increasingly use the renminbi. Since 2014 China and Russia have severely reduced their dependence on the dollar for bilateral trade. The dollar-centered system is both unstable and unfair. - Since the end of Bretton Woods, there have been an increasing number of financial crises. [...]
[...] Developing country resources' could be invested domestically to finance economic growth, instead they are invested overseas in dollar assets. One solution is the emergence of a multipolar system where multiple governments or institutions would issue reserve currencies. There are two possible supplemental reserve currencies: the Renminbi and the International Monetary Fund (IMF) 'special drawing rights' (SDRs). - Compared to the dollar, SDRs have two problems. First, the IMF faces key limits in providing SDR liquidity and acting as a lender of last resort. [...]
[...] China has more than trillion in Treasuries. China faces the risk of enormous losses due to the enhanced exchange rate e?ect: the appreciation of the renminbi would magnify the dollar depreciation accompanying its demise. - In order to ease the transition to new international monetary arrangements we should: Encourage all actors to resort to an SDR-based mechanism which could limit, or spread over time, the changes in the evaluation of o?cial reserves. - While a multipolar system would help in overcoming the Triffin dilemma, its stability properties are hard to assess ex ante. [...]
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