The International Monetary Fund (IMF) has warned that the US dollar dominance as the global trading currency could be threatened by the sweeping sanctions taken against Russia from the late February 'military operations' undertaken in Ukraine. Two monetary systems might emerge, with one western and the other Chinese, and may operate in divergent ways that overlap.

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On March 30, the Russian government has demanded that European countries pay for their natural gas imports from Russia in rubles, rather than in dollars or euros.

"In order to purchase Russian natural gas, they must open ruble accounts in Russian banks. It is from these accounts that payments will be made for gas delivered starting from tomorrow," Putin said in a television appearance.

"If such payments are not made, we will consider this a default on the part of buyers, with all the ensuing consequences," the Russia leader said. "Nobody sells us anything for free, and we are not going to do charity either; that is, existing contracts will be stopped."

The decree targets the United States, the United Kingdom and European Union countries, which Putin calls "unfriendly," the Voice of America said. Europe gets about one-third of its gas from Russia.

Despite the strong words, Italian Prime Minister Mario Draghi and German Chancellor Olaf Scholz reportedly said they had spoken to Putin and were told existing contracts will remain in place.

The move to force ruble payments is seen as retaliation for the vast array of sanctions the West and other countries have placed on Russia since its invasion of Ukraine last month.

The IMF warns

The International Monetary Fund (IMF) has warned that the US dollar dominance as the global trading currency could be threatened by the sweeping sanctions taken against Russia from the late February 'military operations' undertaken in Ukraine. The IMF is worried that using currencies as a weapon will fragment the world economy while making it less efficient.

There are now countries rushing to find ways of transacting and storing money that circumvent the US currencies and financial markets, as well as those of their allies. Some countries are renegotiating the currency in which they get paid for trade, according to Steven Sahiounie.

Western countries, in unison with the US, EU and NATO, have imposed huge sanctions on Russia, including restrictions on its central bank, which could trigger the emergence of small currency blocs based on trade among separate groups of countries.

Russia has sought to reduce its dependence on the dollar after the US imposed sanctions in retaliation to its annexation of Crimea in 2014.

China-Ruble Settlement and the Dollar System

Gita Gopinath, the IMF's first deputy managing director, was quoted by Sahiounie as saying that the greater use of other currencies in global trade would lead to further diversification of the reserve assets held by national central banks and added, "Countries tend to accumulate reserves in the currencies with which they trade with the rest of the world, and in which they borrow from the rest of the world, so you might see some slow-moving trends towards other currencies playing a bigger role [in reserve assets]."

Two monetary systems might emerge, with one western and the other Chinese, and may operate in divergent ways that overlap.

The Great Economic Rivalry, by Graham Allison and associates at Harvard, have concluded that China is strong peer competitor of the US, and its currency could become global money, given the size and sophistication of its economy.

China hopes its currency, the yuan, also known as renminbi, will replace the US dollar as the global currency. The majority of international investors believe this will be inevitable, but none can say when.

When this happens Chinese exporters would have lower borrowing costs, more economic clout in relation to the United States, and would support President Xi's economic reforms.

The US dollar is not backed by gold or any other precious metal, and is a fiat (government-made) currency, since 1971. 59 percent of global foreign currency reserves were denominated in dollars, another 20 percent in euros, 6 percent in yen and 5 percent in sterling, as of the third quarter of 2021, according to Sahiounie.

The Great Illusion of Capitalism

Ukraine could well mark the end of one great episode in human history, John Micklethwait and Adrian Wooldridge wrote on Bloomberg recently under the title: Putin and Xi exposed the great illusion of capitalism.

The West is doing everything it can to "cancel" Russia from the global economic system sanctioning oligarchs, expelling Russian banks from the global financial plumbing, and preventing Russia's central bank from accessing its reserves. There's talk of throwing Russia out of the World Trade Organization.

For many Americans, too, Ukraine has been a pre-Taiwan test case: They don't want to end up relying on Taiwanese components that might suddenly disappear in a puff of smoke.

Other powers will vacillate between these two (or three) great blocs, much as they did during the Cold War. India may do what it has done so well over Ukraine and play both sides. Pakistan will lean toward China but not fully commit while India is in play. Saudi Arabia will exploit uncertainty over energy supplies to pursue brutality at home and Islamist policies abroad. And so on.

So the second age of globalization is fading fast. Unless something is done quickly and decisively, the world will divide into hostile camps, regardless of what happens in Ukraine. And this divided world will not suit the West. Look at the resolution passed by the United Nations General Assembly to condemn Russia's invasion of Ukraine. The most trumpeted figure is that only 40 countries did not vote for this (35 abstained, and five voted against it), compared with 141 countries who voted in favor. But those 40 countries, which include India and China, account for the majority of the world's population.

The changes in geopolitics come down to one word: China, whose rapid and seemingly inexorable rise is the central geopolitical fact of our time, John Micklethwait and Adrian Wooldridge emphasized.

Authors Bio:

Author and journalist.
Author of
Islamic Pakistan: Illusions & Reality;
Islam in the Post-Cold War Era;
Islam & Modernism;
Islam & Muslims in the Post-9/11 America.
American Muslims in Politics.
Islam in the 21st Century: Challanges, conspiracies & Chaos
Muslim Word in the New Global Order
Currently working as free lance journalist.
Executive Editor of American Muslim Perspective: www.amperspective.com