Sweeping Financial Sanctions Against Russia Threaten US Dollar Dominance, Warns IMF

The US and its allies have announced a series of financial measures against Russian banks and leaders in response to Moscow’s military action in Ukraine. India, China, and others have ignored western sanctions and started taking steps to avert what the Kremlin calls the West's “economic war” against Russia.

The financial sanctions imposed on Russia by the US and its allies will gradually dilute the dominance of the greenback, resulting in other currencies playing a more prominent role in the international monetary system, the International Monetary Fund (IMF) has warned.

In an interview with British daily newspaper, the Financial Times, Gita Gopinath, the IMF's first deputy managing director, predicted the emergence of small currency blocks based on trade between separate groups of countries in response to measures taken by western nations against Russia.

"The dollar would remain the major global currency even in that landscape, but fragmentation at a smaller level is certainly quite possible. We are already seeing that with some countries renegotiating the currency in which they get paid for trade," Gopinath said.

Western countries have imposed severe sanctions on Russian financial institutions, including the central bank, and frozen forex reserves worth around $300 billion stashed in US dollars.

"Countries tend to accumulate reserves in the currencies which they use to trade with the rest of the world, and in which they borrow from the rest of the world, so you might see some slow-moving trends towards other currencies playing a bigger role [in reserve assets]," she observed.

Gopinath's observations come days after the Reserve Bank of India voiced similar concerns, saying countries may choose to diversify their forex reserves away from US dollars in the wake of the US decision to freeze Russia's reserves.

The IMF's economist noted a 10 percent reduction in the dollar's share of international reserves over the past two decades.

The India-born economist also added that digital currency will get even "greater attention since the recent episodes, which draws us to the question of international regulation".

Several experts also forecast increasing interest rates on US Treasury bonds, indicating a weakening inclination to store their reserves in US currency.

Ten-year bond yields jumped to 2.35 percent from 1.7 percent since Russia began a special military operation in Ukraine to demilitarise and de-Nazify the eastern European nation.