The war between Russia and Ukraine may mark the peak of the ‘dollar era’ as the momentum behind de-dollarisation gathers pace, says investment manager Ninety One.
Philip Saunders, co-head of multi-asset growth at Ninety One, says the US’ willingness to ‘weaponise’ its currency via the blocking or confiscation of reserves and exclusion from the dollar payment system SWIFT has become clear during the ongoing crisis.
This could place countries such as China, who previously pledged support to a Russian partnership, in an uncomfortable position.
Saunders says: “Geostrategic imperatives will force China to permit a more rapid internationalisation of its currency and develop an alternative payments system. Saudi Arabia, for one, has recently been negotiating with China to accept oil payments in renminbi, avoiding the need to transact in US dollars.
“At a stroke the momentum behind de-dollarisation has received a material boost.”
While Saunders said the dollar is too deeply embedded in the world’s trading system to be supplanted in the near future, the crisis could mark ‘the peak’ of the dollar era.
In addition, the war has prompted a profound change in energy and defence policy across Europe, with reliance on Russia as an energy supplier set to be reduced significantly.
Saunders says: “In retrospect, the extent of reliance on a personalised dictatorship for essential raw materials will seem extraordinarily misguided. The extent of Europe’s wider challenge can be seen from the numbers. Since the beginning of the war, EU nations have paid Russia over €35 billion in energy payments. By contrast, Ukraine has received €1 billion in arms and weapons.
“The other volte face was in defence spending. Germany is now committed to double defence spending and non-aligned Sweden has announced that its defence budget will rise to 3% of GDP. The peace dividend is well and truly a thing of the past.”
Saunders says increased expenditure will be financed with debt on a pan EU basis which will take the EU further down the path of monetary union.
Saunders added: “America’s ‘exorbitant privilege’, to use former French President Giscard d’Estaing’s apt expression, of having first call on the world’s savings will progressively be eroded.”
[Main image: sharon-mccutcheon-8lnbXtxFGZw-unsplash]
