The World Is Seeing How the Dollar Really Works

Adam Tooze in Foreign Policy:

2022 has been a year of dollar power—power that manifests itself in both overt and subtler forms.

In the spring, the financial sanctions slapped on Russia’s Central Bank following Russian President Vladimir Putin’s invasion of Ukraine demonstrated the extent of U.S. financial sway, especially when it is exerted in cooperation with America’s European partners. If you export far more than you import and thus hold really large foreign exchange reserves—like Russia’s $500 billion—there really is nowhere else to hold them other than dollars or euros. If it comes to a confrontation, that puts you at the mercy of the financial authorities of the United States and its alliance partners. NATO reveals itself to be a financial power.

Russia has, so far, ridden out the storm, but to do so it has had to close its financial system to the outside world. Its imports have been squeezed to barely more than half their pre-crisis level.

When the sanctions were applied, the shock to Russia provoked the question of whether a monetary system that conferred such one-sided power on the United States could possibly be sustainable.

More here.