AMAC Exclusive – By Andrew Abbott
As the Russian economy strains under the weight of severe western sanctions following Putin’s invasion of Ukraine, the Russian President appears to be looking eastward for salvation. After Visa and MasterCard – which combined generate more than $1 billion in revenue from Russia annually – announced they would suspend all operations in the country late last week, Russian banks announced a potential plan to replace American credit cards with new cards backed by China’s UnionPay. This seemingly small act might be the first red flag that western sanctions of Russia, if they aren’t used correctly, could drive America’s two chief adversaries closer together, and might even bring the primacy of the U.S. Dollar to an end.
The U.S. Dollar has been the dominant global currency since World War II. In 1944, a delegation of 44 nations came together at Bretton Woods, New Hampshire, with the hope of creating a global exchange system. Ideally, this system would promote international growth, increase global cooperation, and ease the barriers to doing business between nations. The “Bretton Woods Agreement” created the International Monetary Fund, the World Bank, and critically “required a currency peg to the U.S. Dollar which was in turn pegged to the price of gold.” Although the system would collapse in the 70s following President Nixon’s decision to take the U.S. off the gold standard, the agreement, along with the strength and stability of the U.S. economy, has made the U.S. Dollar the dominant international currency to this day.
Part of the reason for the historic strength of the U.S. Dollar is that the U.S. Federal Reserve guarantees that every single dollar printed will be honored. Yet, late last month, the Biden administration announced that it would “immobilize Russian central bank assets that are held in the United States.” This effectively froze all of Russia’s foreign exchange dollars. John E. Smith, the former director of the Treasury Department’s Office of Foreign Assets Control, told the New York Times this move was “unprecedented to a scale and scope that we haven’t seen since the Cold War.” As he went on to explain, the sanctions now being imposed by the Biden administration on Russia “are simply beyond comparison to previous sanctions regimes, particularly involving a major power like Russia.”
Presidents have frozen the assets of rogue states in the past. Last year, Biden froze half of Afghanistan’s foreign currency reserves following the collapse of the American-backed Afghan government. Yet, as Smith notes, the U.S. has never frozen assets on this large scale since the Cold War.
As the credit card switch signals, however, Russia believes it has an “ace in the hole” to counter these sanctions. China is aggressively pushing to “dethrone the dollar” with its own currency. China has made multiple attempts to “de-dollarize” the global economy in the last two decades by promoting the Yuan as a more stable alternative. Notably, the Chinese have created the “CIPS System,” an alternative to the SWIFT international banking system from which Russia was recently expelled. As U.S.-Chinese relations have deteriorated in recent years, China has used every opportunity to turn the global economy into a bifurcated system that runs less on SWIFT and more on CIPS. The stronger China’s system becomes, the weaker the U.S. leverage over the global economy. Should the Yuan replace the U.S. Dollar as the de facto global currency, it would likely lead to a significant international recession and financial crisis for America.
Putin has stated multiple times that his goal in invading Ukraine is the establishment of a “Russian Sphere of Influence,” explicitly distinct from the West. In a roundabout way, Western companies exiting Russia may help Putin achieve this goal, while also providing a golden opportunity for China to grow its financial influence in a market of 140 million people. Visa and Mastercard are not alone in their boycott of Russia. Companies from McDonald’s to Tinder have shut down their Russian operations and will not reopen until the current crisis is resolved – if they ever do.
If Putin attempted to expel the U.S. Dollar, McDonald’s, or Visa from Russian soil before his invasion of Ukraine, he likely would have faced severe backlash from his people, who have in recent decades become accustomed to the benefits of Western restaurants, stores, and services. Now, in part due to these sanctions, he doesn’t have to kick them out – the companies are choosing to leave Russia themselves. And with China ready to swoop in and replace the presence of those Western companies, Putin can ease the shock to the Russian economy.
Nonetheless, the transitional pains associated with something like two major credit card carriers exiting Russia will still be very real for ordinary Russians. This may also backfire against the West. On the day of Russia’s invasion, thousands of Russians took to the streets to protest Putin’s aggression. However, sanctions that make it harder for those protestors to do things as simple as buying a loaf of bread or paying for medicine might have the unintended effect of galvanizing the Russian population against the West. Such a move would be disastrous for U.S. national security interests if it drives Russia and China even closer together.
While the Biden administration has thus far avoided the blunder of embroiling the U.S. in a direct military confrontation with Russia, their sanctions strategy – along with that of most of the West – has in some ways been crude, imprecise, and potentially dangerous to American interests. The job of a leader is to see the entire playing field, even in a moment of crisis. China is still the biggest threat to U.S. global leadership.
Instead, Biden and Western leaders should target Putin and his cronies while actively working to avoid driving Russia further into the arms of China. Otherwise, the West may be opening the door to a much more dire threat down the road.
Andrew Abbott is the pen name of a writer and public affairs consultant with over a decade of experience in DC at the intersection of politics and culture.