Is this a Second Cold War? Is De-Dollarisation inevitable?

The third-world and the non-West are coming heavily on the US and its allies for being hypocritical in their stance. There is pent-up anger that is exploding like a grenade onto the West, especially the USA. Some are of the view that de-dollarisation is not bad.

 

The Russian-Ukrainian war is not confined to the geopolitical dispute any longer. It's beyond humanism, nuclear weapons and territories. The major fallout of this war is the economy. It sets the precedence.

Recent stringent Western sanctions are a stress test of Russia's de-dollarisation initiatives and an emerging non-dollar financial system. Besides de-SWIFTing Russian banks, Western sanctions have targeted the assets of the Russian central bank and sovereign wealth funds, etc. These punitive measures effectively wiped out the thirty-year post-Cold War Western financial engagement with Russia.

Anti-Dollar axis led by Russia-China nexus

Today's geopolitical realities are even messier than during the cold war, blurring any neat moral opposition between democracy and autocracy. Turning to Venezuela and possibly even Iran to alleviate pressure on oil prices, the United States is already hollowing out its "alliance of democracies."

Some are of the view that de-dollarisation is not bad. They view it from the prism of rebalancing of the fiscal and monetary tools. This certainly does not mean a complete substitution of the US dollar. If done at a manageable pace, a secure investment environment can be built, and mitigating unforeseen shocks could be cushioned.

The art of war the international history witnessed in the essential form of the World Wars was based on military might and hard power. However, disputes and wars have surpassed this stretch in today's time.

China has prophetically nailed this art. It has aggressively taken economic initiatives to navigate its path to becoming a supposed 'economic hegemon'. But will it attain this title or not is a moot point.

However, focusing on past events indicates that China and Russia have been working to categorically strengthen their financial system to defend against threats. In 2014, The Central Bank of the Russian Federation created its messaging system — the System for Transfer of Financial Messages (SPFS). As of 2020, SPFS traffic is almost 13 million messages per day. More than 400 financial institutions are part of the Russian SPFS.

China launched the Cross-Border Interbank Payment System (CIPS) in 2015, backed by the People's Bank of China (PBoC). CIPS offers a safe transactional system to China without the risk of exposing any information to the United States.

The cheaper and more efficient blockchain technology is already a threat to SWIFT. China launched e-CNY, Digital Yuan, in January 2022 and is driving its adoptions through mobile apps within the country. The Russian CryptoRuble is expected to be launched in 2022.

Meanwhile, China has stood as Russia's only major diplomatic partner since the invasion. A joint declaration issued after an early-February meeting between Russian President Vladimir Putin and Chinese President Xi Jinping announced their mutual ambition to create a new global order on the strength of a partnership that has "no limits."

The Non-Western Angle: Resentments for the West and looking for alternatives 

The third-world and the non-West are coming heavily on the US and its allies for being hypocritical in their stance. There is pent-up anger that is exploding like a grenade onto the West, especially the USA.

India has been on a tight leash and walking on eggshells. Long-standing ties with Russia meets about half of India's needs for military hardware, only partly explaining India's refusal to stand with its US, Australian and Japanese partners in the Quad.

Like many governments around the world, which were already fighting politically treacherous inflation, PM Narendra Modi's administration worries about the rising price of Russia's key exports like oil, wheat and fertilisers etc. And PM Modi surely appreciates Russia's consistent support for India's stripping of Kashmir's constitutionally guaranteed autonomy.

For all these reasons and more, India won't depart from its fundamental geopolitical strategy of non-alignment, playing off one power against another while securing material and diplomatic commitments from both sides.

Although India has not been an enthusiastic advocate for such a de-dollarisation partnership, it has developed ways to trade with Russia while bypassing sanctions.

India has been exploring a rupee-ruble trade arrangement with Russia following Western sanctions on Russia. For instance, India and Russia have already arranged a rupee-ruble exchange mechanism to settle Russian arms sales to India to avoid sanctions under CAATSA. In 2021, the two countries abandoned the dollar when conducting arms sales.

India's purchase of 3 million tonnes of Russian crude and exploring the non-dollar oil trade with Moscow was characterised as putting New Delhi on the "wrong side of history". This is despite oil trade with Russia being exempt from the US sanctions under European pressure, which cannot completely alienate the world's second-largest oil producer.

India has reportedly expressed interest in jointly exploring with Russia and China an alternative to SWIFT that would allow it to trade with countries under US sanctions.

While India currently does not have its own domestic financial messaging system, it plans to link a service currently under development with Russia's SPFS. India has several options for initiating its de-dollarisation process. Starting from, of course, Russia-India transactions, trade with Iran, EAEU, BRICS and SCO members in national or digital currencies can also become a reality in the near future.

In this multipolar world, the only way forward would be to diversify the currency market with no one currency claiming hegemony. The global coverage of this alternative system could appeal to countries that are either vulnerable to US sanctions or discontent about the US dollar's dominance.

China's CIPS currently has three direct participants in Europe. The recent Chinese Foreign Minister Wang Yi's outreach by offering to visit India was the strongest signal to thaw ties, as the two countries find themselves on the same page over resisting United States pressure on the Russian intervention in Ukraine and non-US Dollar oil trade.

PM Modi expressed condolences over the airliner crash in China's Guangxi, hinting Wang's gesture might be reciprocated. Whether a genuine desire for de-escalation or pragmatic rapprochement, the outcome only buttresses the emerging 'Asian Century' of which India should not be a mere physical part.

Also, Japanese PM Fumio Kishida met with PM Narendra Modi recently, with the joint statement referring to the war as a "humanitarian crisis" and no implied condemnation of Russia.

West Asia had long begun drifting away from the US after Saudi Arabia, and the UAE refused to pump more oil to cool soaring prices and save Biden from rising domestic inflation. This was in response to Biden calling Saudi Arabia a "pariah state". Both Crown Prince Mohammed bin Salman and UAE Crown Prince Mohammed bin Zayed Al-Nahyan have refused to take Biden's calls to engage the OPEC+ nations in increasing oil production.

These actions indicate the threat to the status of the US dollar and the American hegemony, which it held for so long, is facing resistance and challenges. Whether or not de-dollarisation trends help Russia to dodge the sanctions and China to take its revenge, it is certainly a blot for the USA.

No matter what happens in Ukraine, the following trends are only set to intensify: opportunistic non-alignment, de-democratisation, de-dollarisation of the international financial system and general de-Americanisation of the globe.

This is no more about Ukraine being under attack by Russia. Ukraine is lost in this intense face-off. It is the Cold war deja vu we are witnessing, but it is more of economic warfare this time.