Russia’s invasion of Ukraine and the ensuing economic war reopened the question of whether the dollar’s trade dominance was coming to an end. What would it take for global trade to take place outside of the US financial system, shattering the status quo that governed it for much of the last century?

This moment has been awaited for decades, with the euro and the yuan being touted as potential successors to the dollar. The traditional argument has been that as these rival economies become larger than the United States, their financial gravity will lead them to gradually usurp the role of the American financial system. Overall, that hasn’t happened since the euro came into effect in 1999 and China joined the global trading system in 2001.

Each of these currencies has its downsides, according to Federal Reserve economists: The euro still sits uncomfortably atop a confederation of independent states, not a single fiscally integrated government, with unpredictable outcomes, like the showed Brexit. China, on the other hand, does not allow its currency to be freely traded or managed by independent institutions, which makes it less attractive than the US dollar.

Now, however, the massive sanctions imposed on Russia have some commentators wondering if the United States and its allies have created incentives to switch to another currency.

How major exporters could push against the dollar

It looks like this, according to Zoltan Pozsar, bond market strategist at Credit Suisse. In a world of increasing supply chains and trade challenges, where commodity prices are rising amid high inflation, major exporters will be able to demand payment in their own national currency. “It used to be as simple as ‘our currency, your problem’. Now it’s ‘our commodity, your problem’,” Pozsar wrote in March.

For example, he notes that Russia is trying to obtain payment in rubles for its exports, and that Saudi Arabia is considering allowing China to pay for its oil in yuan. As countries focus on securing stocks of key commodities, dollar demand and dollar debt will fall, and the offshore yuan will begin to dominate global trade.

It’s a compelling picture, but certainly in the short term, unlikely. For one thing, Russia doesn’t have much luck getting rubles for its petroleum products, and as a country that depends on imports for many non-commodity goods, it might not be successful. It also failed to leverage another key commodity, gold, to avoid sanctions. Likewise, it is uncertain whether Saudi Arabia actually let China pay for its oil in yuan.

And a commodity-based global monetary system would be volatile, probably more so than most investors would like. As analyst Joseph Politano writes, “there is a reason no major country uses the gold standard anymore.”

Again, no one eats gold or powers their factories with it. Pozsar’s thesis is that the scarcity of oil and wheat will alter this dynamic. Yet real future wheat and fertilizer prices have changed “significantly but not historically,” according to one agricultural economist. Crude oil prices have not reached the record highs predicted by some analysts after the invasion of Russia, and it is currently cheaper than in 2014. The world could prove more resilient than expected, especially if the countries are encouraged by these events to seek energy. independence through renewable energy.

What about politics?

Economic arguments for the strength of the dollar system are sometimes based on the same idealism that defends the shared benefits of free trade. Real-life political impulses are often economically harmful, as Donald Trump’s trade policy and Brexit show, and this kind of autarkic nationalism lends itself well to the potential fall of the dollar. But in recent weeks we have seen that the dollar system is still backed by significant soft power.

The idea that the United States is abusing its dominance of global finance arises whenever it applies anti-money laundering penalties or sanctions against foreign states like Venezuela and Iran. The United States, especially when acting capriciously, gives other states reason to move away from its currency. But throughout these experiments, we have seen little evidence that the dollar is losing ground.

Consider recent research by economist Barry Eichengreen, perhaps the authority on reserve currencies. He finds that the share of US dollar reserves has fallen from 70% to 59% over the past two decades. But economist Adam Tooze points out that the currencies showing gains all come from states close to the United States, such as Canada, Australia and South Korea, and moreover, those whose central banks benefit from the credit lines. US Federal Reserve international swaps.

Similarly, if you think geopolitics is driving currency trends, Russia hasn’t exactly covered itself in glory in Ukraine. The longer he gets bogged down in a costly and unpopular war, the less economic leverage he will have. While China hasn’t abandoned Russia, it hasn’t attempted to broadly undermine sanctions either, a sign of where the winds are blowing.

Institutions matter here. Even if China were to take the necessary steps to make the yuan widely attractive to investors, such as opening up its capital account, it would still be run by an autocratic government with opaque processes. The uncertainty surrounding the future of a struggling company like Evergrande would not do well when applied to a monetary regime. In recent years, China’s liberalization has slowed. This is why many see the euro as a more threatening rival to the dollar, but the EU, with few exceptions, generally joins efforts to sanction nations that violate international law.

Dollar dominance won’t last forever

The extraordinary dominance of the dollar as a currency of exchange in the second half of the 21st century is likely to fade over time. The question is which currency will replace the dollar, or perhaps more realistically which of the multiple trading currencies will work side by side. Investors expect from a reserve currency: stability, security, value and liquidity. Until another currency can offer all four, it’s hard to see the dollar being supplanted.

American policymakers, however, should not rest on their laurels. Decisions such as the unilateral reimposition of sanctions against Iran by the Trump administration or the Biden administration’s seizure of foreign exchange reserves from Afghanistan are undermining confidence in the US financial system. Abandoning trade relations, whether through counterproductive tariffs or leaving trading blocs like the Trans-Pacific Partnership, also diminishes the dollar’s potential as a global currency. High inflation, while clearly a global phenomenon, does the same.

Russia’s invasion of Ukraine offered many warnings about the danger of autocratic states and the risk of depending on them for key energy resources at a time when decarbonization should be an international goal. But rather than demonstrating the weakness of the US-led financial system, the sanctions against Russia have shown that it is surprisingly strong and could be kept that way.