Are US sanctions on Russia harming USD supremacy?

The United States' reliance on economic sanctions to coerce other countries is gradually losing its effectiveness and slowly degrading one of Washington's most influential tools in international affairs, the power of the U.S. dollar, experts said.

Ever since the US announced its unprecedented package of financial sanctions on Russia, a growing contingent of analysts and economists have warned that the measures risk undermining the greenback’s reserve currency status and balkanizing the global monetary order. 

The US Treasury’s ‘shock and awe’ move to sanction the central bank, something never attempted on an economy of Russia’s size, could have unintended consequences by causing other countries to rethink their relationship with the USD, they say.

The IMF is voicing concern. The IMF’s deputy managing director, Gita Gopinath, said just that last month. “The USD would remain the major global currency even in that landscape but fragmentation at a smaller level is certainly quite possible,” she told the Financial Times in an interview last month. 

The USD is the world’s reserve currency. Central banks across the world store most of their reserves in USD or in USD-denominated assets such as treasuries, and the bulk of international trade and financial transactions are performed using the greenback.

How much of global reserves are in USD? The most recent data from the IMF shows that the currency makes up around 55% of the world’s foreign exchange reserves. In comparison, the next most-popular FX currency is the EUR, which accounts for less than 20% of the global total.

Crucially, foreign currency reserves are hardly ever held physically by the central bank, making them vulnerable to appropriation by other countries. Most of the world’s reserves are held as securities, which are stored in central securities depositories (CSDs) either in the host country or with a major international CSD such as Euroclear. 

In recent years, the US has used its control of the global financial system as a coercive foreign policy tool with increasing regularity. Iran, Venezuela and most controversially Afghanistan have all had their reserves frozen and been excommunicated from the USD system.