As the Russia-Ukraine conflict reaches its second anniversary on February 24, 2024, its far-reaching economic repercussions continue to reshape the global financial landscape. A new report released this week by the Chongyang Institute for Financial Studies of Renmin University highlights the acceleration of economic decoupling as one of the most significant outcomes of the ongoing crisis.
The report indicates that the intensified use of economic and financial sanctions by the United States has propelled emerging markets to pursue de-dollarization strategies. “The weaponization of sanctions has increased the motivation among global emerging markets to reduce reliance on the U.S. dollar,” the report states.
To date, approximately 70 countries have initiated efforts to diminish their dependence on the dollar. These measures include accelerating the development of cross-border payment systems, exploring regional currency alliances, settling international trade in local currencies, and advancing central bank digital currencies.
Despite these efforts, the report notes that the conflict has not fundamentally altered the international monetary system. The U.S. dollar’s share of global reserves remained stable at nearly 60 percent between 2021 and 2023, underscoring its enduring role as the world’s primary reserve currency. In contrast, the euro and other currencies have seen a decline in their global reserve shares, with the euro’s share dropping by about one percentage point.
The turmoil stemming from the conflict has also led to a surge in energy and food prices, triggering inflationary pressures worldwide. In June 2022, the U.S. Consumer Price Index soared to 9.1 percent—the highest in 40 years—forcing the Federal Reserve to implement sharp interest rate hikes. According to the report, these actions contributed to the European and American banking crisis of 2023.
Global investors are increasingly factoring geopolitical risks into their strategies, leading to heightened risk aversion in financial markets. In 2022, all three major U.S. stock indexes experienced their most significant annual declines since the 2008 global financial crisis.
Moreover, elevated U.S. dollar interest rates have attracted capital back to the United States, intensifying capital outflow pressures on emerging economies. This shift has exacerbated debt crises in low- and middle-income developing countries, the report warns.
“The conflict has underscored the fragility of the interconnected global economy,” the report concludes. “Policymakers and investors must navigate an increasingly complex financial environment shaped by geopolitical tensions.”
Reference(s):
cgtn.com
