May 17, 2024: Global News Roundup

“But we need to think about the long-term impact on the global currency”—Steve Mnuchin, sanctions, and the US dollar

Good Morning,

Back in 2018 while attending the annual World Economic Forum meeting in Davos Switzerland, then-Treasury Secretary Steve Mnuchin made some comments about the US dollar that “roiled” financial markets. Specifically, Mnuchin noted at Davos that he “welcomed a weak dollar”, and then subsequently backtracked on those statements to calm investors and markets, affirming instead his commitment to a “stable” dollar. “One of the things I've clearly learned as treasury secretary, I'm very careful about my comments on the dollar, because two years ago in Davos, I sneezed, and I said something that I thought was completely calm, and all of a sudden the markets went crazy," noted Mnuchin in 2020 speech in London.

(Image: U.S. Treasury Secretary Steven Mnuchin speaks at Chatham House in London, Britain, January 25, 2020, REUTERS/Henry Nicholls, here).

Especially important was the context in which Mnuchin made his controversial comment about the dollar’s lackluster future—he was talking about US sanctions. “Mnuchin said that as the dollar is the reserve currency of the world, he was very conscious of the effect of sanctions on it, which he said were effective in helping to achieve national security goals.”

His fears about the threat that sanctions could ultimately pose to the US dollar arose again in 2020 when John Bolton—who served as US Ambassador to the UN under the 2^nd President Bush and National Security Advisor under President Trump—published a book casting Mnuchin as “the chief opponent of the Trump administration's increased reliance on economic sanctions”, citing Mnuchin’s worry that “an over-reliance on such measures will weaken the global primacy of the dollar”. According to the Straits Times,

In encounter after encounter, President Donald Trump's former national security adviser describes Mr Mnuchin standing in the way of tough economic punishment - against Venezuela, Russia, China and others.

He feared other nations would stop using dollars and that the stress on the global financial system would be too great…

Mr Mnuchin argued that blocking others' access to the US financial system "would undermine the status of the dollar as the world's reserve currency and encourage others like Russia and China to conduct transactions in euros or through counter trade and other techniques…

Just a few years later, it appears today that US officials are (inexplicably) determined to prove Mnuchin right.

Having apparently learned very little from the US’s experiences sanctioning Russia since the Ukraine war began in 2022, on April 24, President Biden signed HR 815—the National Security Act of 2024—which, among other components, contains new provisions on sanctions (extends statute of limitations for investigating violations from 5 to 10 years) and authorizes the confiscation of Russian central bank assets to redistribute to Ukraine (i.e., the REPO Act). Then, in early May, US officials unveiled a large, new sanctions package against entities in China and a handful of other countries accused of supplying critical military-industrial supplies to Russia.

As I’ve argued before, sanctions against Russia imposed by the US and EU after the Ukraine war began in February 2022 represented a critical juncture, a policy pivot point of sorts that marked in time the geopolitical moment when US sanctions boomeranged, transforming national security advantages into painful self-inflicted financial and monetary wounds.

For example, over the past two years, sanctions against Russia have helped push Russia into a cozier alliance with Iran and China, facilitated the fragmentation of global markets into dollar-based and non-dollar-based trading systems (including major commodities markets, e.g., for oil, gold, and silver), and supported a massive economic transition that saw Western European economies shrink and de-industrialize while the Russian economy grew relatively stronger.

Further, sanctions on Russia have not served their most important and essential purpose, which is to deter military conflict. The war in Ukraine continues and Russia has captured most of Ukraine’s territory east of the Dniper River. This week, international outlets reported additional Russian gains associated with its offensive around Kharkiv (see, e.g., here and here).

Referring to the new sanctions package, US treasury secretary Janet Yellen said on May 2, “Today’s actions will further disrupt and degrade Russia’s war efforts by going after its military industrial base and the evasion networks that help supply it,”. The Guardian noted that “The almost 300 targets include dozens of actors accused of enabling Russia to acquire technology and equipment from abroad. Other than China, targeted non-Russian entities were located in Azerbaijan, Belgium, Slovakia, Turkey, and the United Arab Emirates (UAE). These companies “enable Russia to acquire desperately needed technology and equipment from abroad”, a treasury statement said.”

Predictably, China is retaliating against the US (mercantilist systems are defined by tit-for-tat economic warfare). Last month, China imposed travel bans and property freezes on senior executives from two US defense companies, General Atomics Aeronautical Systems and General Dynamics Land Systems, “in response to their arms sales to Taiwan” (a similar set of measures was implemented against executives from Raytheon and Lockheed Martin last year). More recently, in response to the new US sanctions package, Chinese state media raged about US “hypocrisy” and “false accusations” of supporting Russia in the Ukraine war, and promised to “take necessary measures to resolutely safeguard the legitimate rights and interests of Chinese enterprises victimized by the recent US sanctions”.

It also bears repeating that China is the world’s largest goods exporter, so US sanctions on China also pose significant threats to a many other countries (see here for a really cool visual of China’s trade network). I don’t think the US wants to see what happens if they put an ultimatum to the world, forcing them via sanctions and other penalties to choose between having China or the US as a trading partner. Even many traditional US allies are hugely dependent on trade and financial relationships with China (e.g., Germany, Korea, Japan)…

Meanwhile, in Russia, news about formal US approval for confiscation of Russian central bank assets landed poorly, prompting threats of retaliation. “Washington has passed a law on the confiscation of Russian assets in order to provoke the EU to take the same step, which will be devastating for the European economy,” said Vyacheslav Volodin, a Russian politician and close ally of President Vladimir Putin, in early April. (See here for more information on the status of the EU’s deliberations on this matter). Volodin continued, “Our country now has every reason to make symmetrical decisions in relation to foreign assets.”

In early May, Reuters reported that “Former President Dmitry Medvedev…acknowledged that Russia did not have enough U.S. state property to retaliate symmetrically and would have to go after private investors' cash instead - a step he said would be no less painful.” US financial giant JP Morgan has been wrestling with Russian courts over potential asset seizures over the past few months, providing a recent example of what this could look like moving forward for targeted US businesses.

And, it’s not just Russia, China, Iran, Venezuela and the other usual suspects under threat of US sanction these days. The US seems to be growing more reckless and impulsive with its imposition of sanctions, even threatening nations that have long been considered US allies. The BBC reported on Tuesday that the US threatened India with sanctions this week over a recent deal with Iran to build a port. "Any entity, anyone considering business deals with Iran - they need to be aware of the potential risks that they are opening themselves up to and the potential risk of sanctions,” said US State Department Deputy Spokesperson Vedant Patel.

As should be patently obvious at this point, as the US continues to impose more sanctions and other similar penalties, it is creating a geopolitical context in which de-dollarization practically sells itself. Who wants to keep trading in dollars and holding assets in Western banks and financial institutions given the increasing risk and cost involved?

Whatever else you might think about him, former Treasury Secretary Mnuchin understood this dangerous dynamic well: “But we need to think about the long-term impact on the global currency”, stated a quote from Mnuchin in the 2021 Sanctions Review from the US Department of the Treasury. The report further noted:

American adversaries—and some allies—are already reducing their use of the U.S. dollar and their exposure to the U.S. financial system more broadly in cross-border transactions. While such changes have multiple causes beyond U.S. financial sanctions, we must be mindful of the risk that these trends could erode the effectiveness of our sanctions…

In the roughly 7 months since my cover story on the USD ran in Dollars & Sense, the dollar’s decline has only grown more visible, even as US policymakers turn a blind eye to their own role in its demise. The news on this issue is getting so thick these days, I can’t neatly capture it in these Roundups anymore. Here are a small sample of recent international headlines since April, including discussions of the pivotal role of US sanctions, gold, and the BRICS organization in the de-dollarization process:

·       “Central banks stage gold rush as shield against western sanctions” (here)

·       “Putin’s trip to China may show US threats are wishful thinking: They will privately brainstorm options for a sanctions-proof infrastructure before quietly implementing them” (here)

·       “Venezuela to accelerate cryptocurrency shift as oil sanctions return” (here)

·       “BRICS pushing for common currency, in bid to reduce reliance on US dollar: South African envoy” (here)

·       “What is a BRICS currency and is the U.S. dollar in trouble” (here)

·       “And now, BRICS eyes creation of a central bank for currency issue” (here)

·       “BRICS Bloc’s Bullion Buy Up Buoys Trend Toward Dedollarization” (here)

·       “BRICS should be ready for dollar collapse” (here)

·       “UAE, Indonesia sign MoU to use local currencies for trade” (here)

·       “India, Ghana discuss UPI operationalisation, local currency settlement” (here)

·       “Maldives to reduce country’s dependency on the dollar” (here)

·       “Zimbabwe launches new gold-backed currency – ZiG” (here)

·       “India, Nigeria ditch US dollar, will trade in local currency” (here)

This week, Russian President Putin traveled to Beijing to meet with Chinese President Xi. Putin’s statement to the media about the visit included the following careful comments about sanctions and the US dollar: “The enhancement of trade and investment ties was greatly aided by the coordinated measures implemented to shift payments between our countries into national currencies. Currently, the ruble and yuan comprise over 90 percent of Russian-Chinese commercial transactions, with this proportion steadily increasing. This trend signifies that our mutual trade and investment are securely protected from the influence of third countries and adverse developments on global currency markets.”

Things I’m keeping an eye on:

1.     Anti-imperial dynamics: Open defiance of the West has become something of a trend in recent years, with many former Western colonies breaking ties with the old empires and charting a new course (e.g., see here for my write-up on El Salvador). Last month in Niger—where a military junta came to power by coup last summer and began severing various economic and political ties with its former colonizer, France—the government told the US to withdraw its roughly 1,000 troops currently stationed there. “The US is being forced to withdraw from Niger as it is not favored either by the ruling military or by the population that is rejecting post-colonial forces. Protesters took to the streets in the capital earlier this month to demand the departure of US forces”, reported Al Jazeera. And, earlier this week, the French government sent troops to New Caledonia, a French territory in the Pacific, to try to quell massive public protests and rioting (some of which turned violent). According to the BBC, “Clashes erupted on Monday after lawmakers in Paris backed changes to voting rolls that the indigenous population say will dilute their political influence.”

2.     BRICS: The BRICS meet in Moscow in the coming weeks, and then again in October. I’m interested to see what comes out of these meetings in terms of a new trading/monetary architecture.

3.     Commodities prices: Gold, silver, energy, copper, coffee, cocoa… some analysts are anticipating a commodities super cycle characterized by sustained, higher-than-average prices, especially for base metals like copper.