IMF Warns Russia Sanctions Could Hurt US Dollar Dominance, Cause Fragmentation In Global Financial System: FT

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  • IMF's first deputy MD Gita Gopinath warned that the Western sanctions on Russia could create small currency blocs based on trade between separate groups of countries, the Financial Times reports.
  • All of which could gradually dilute the dominance of the U.S. dollar leading to a more fragmented international monetary system.
  • Gopinath noted that the dollar's share of international reserves dropped from 70% to 60% over the past two decades, thanks to the Australian dollar, followed by the Chinese renminbi. 
  • The dollar would remain the primary global currency, but fragmentation is undoubtedly quite possible at a smaller level, Gopinath admitted.
  • The war would also spur the adoption of digital finance, from cryptocurrencies to stablecoins and central bank digital currencies.
  • The greater use of other currencies in global trade would further diversify the reserve assets held by national central banks.
  • Beijing looked to internationalize the renminbi before the current crisis and was already ahead of other nations in adopting a central bank digital currency, said Gopinath. However, the renminbi was unlikely to replace the dollar as the dominant reserve currency. 
  • Russia sought for years to reduce its dependence on the dollar. However, it held a fifth of its foreign reserves in dollar-denominated assets before the invasion, with a notable chunk in Germany, France, the U.K., and Japan.
  • Photo by Sharon McCutcheon on Unsplash
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