To paraphrase Ernest Hemingway, change in the macroeconomy and global financial system happens slowly and then all at once. Wars have similarly proven to act as catalysts for these systemic recalibrations. With the Russian invasion of Ukraine more than a month old, it is time to take stock of what has happened and infer what the longer-term consequences of this war might be, particularly for the global financial and monetary framework.

Perhaps most interesting is what has not happened. Following the invasion of Ukraine the Russian rouble duly collapsed, weakening around 35% almost instantaneously. Since then it has dramatically bounced back and erased almost all its losses, stabilising at around 8% weaker from where it was trading before the war. It has not continued to implode. This is largely due to the aggressive hiking of interest rates by the Central Bank of Russia to 21%.

Second, the sanctions levelled on Russia were among the harshest against any country, let alone a member of the G20. Banned from the international payment system Swift and with the vast foreign exchange reserves of the Russian central bank effectively confiscated, expectations were that a mass failure of the banking sector could happen, with ensuing runs on deposits. This did not transpire. Instead, the central bank managed to prop up commercial banks by dropping reserve requirements and providing ruble liquidity in droves. It seems that most, if not all, banks in Russia are limping along on life support.

Third, much to the chagrin of Ukrainian President Volodymyr Zelensky, the world is still buying Russian oil and gas, a critical source of foreign exchange for President Vladimir Putin’s war machine. Although Europe would love to immediately cut all purchases of Russian gas, the European Commission believes that to do so would be economic suicide. Instead, the continent is intent on phasing out Russian gas incrementally before 2024. The UK has indicated that it will do much the same. Russian oil is largely not being bought by Western oil majors, which are effectively self-sanctioning. However, it is still finding buyers (at substantial discounts) in China and India, which have increased purchases of Russian oil by up to four times, according to Kpler, a commodities data and analytics firm.

Finally, the Central Bank of Russia still has more than $200-billion of gold bullion in its Moscow vaults. It seems that these are proving to be a critical factor underpinning the resilience of the Russian financial system, backing repo lines of credit to commercial banks. Importantly, experienced central bank governor Elvira Nabiullina – who attempted to quit when she heard of Putin’s plans to invade Ukraine but was subsequently banned from doing so by Putin himself – has been an instrumental part in minimizing the cataclysmic financial market fallout of the war.

What happens now? And, furthermore, what impact will all the above have on the future global financial system?

First, one would expect that sanctions on the Russian central bank and commercial banks will aid the development of financial centres in East Asia, which are still happy to lend and indeed borrow from Russian financial institutions. China and India, in particular, have become key sources of liquidity for the Russian financial system, with Russian banks quadrupling their trading volumes of RMB (renminbi), according to Bloomberg. These ties are likely to become stronger and more entrenched, possibly also in the form of an integrated payment platform that can operate outside of Swift, perhaps based on the Chinese Cross-Border Interbank Payment System.

Second are future current account surpluses and foreign exchange reserves of the Russian central bank. As oil and gas revenues burgeon, given skyrocketing energy prices, these will have to flow into gold, or securities and currencies they can still access. This will deepen Russian financial linkages to those financial markets that are amenable to Russia. Once again China, India and the UAE are likely to experience much greater inflows of Russian foreign reserves.

Third is how the war and sanctions affect the behaviour of other emerging market central banks, sovereign wealth funds and state-run pension funds. It is now clear that Western powers are able and willing to block a country’s dollar, euro and Swiss franc reserves should that country do something thought to be against the interest of the West (invading a sovereign neighbour, such as a large island in the South China Sea, for example).

It must be a source of great concern and frustration to countries that are seeking political agency outside of the West – in particular China and India – to know their astronomic foreign reserves could be at risk and depend on kowtowing to the US and Europe. China, India and other emerging markets could therefore seek to emulate Russia and increasingly diversify away from the greenback to find alternative currencies, assets and markets in which to stash their cash.

Tired references to “dollar dominance” notwithstanding, this is not in itself a new trend. Indeed, the share of dollars of global foreign exchange reserves has been trending downward for 20 years, from a bit over 70% at the turn of the century to just 59% in the third quarter of 2021. Much of the slack has been taken up with increasing prevalence of the RMB. This decline of the once almost universal usage of the dollar as the global reserve currency will continue, albeit at a much faster rate.

Finally, a further development of this trend is if trade increasingly starts being invoiced in alternative currencies to the dollar. Perhaps an early indication of this is Russia asserting that all purchases of its oil and gas will be in rubles. It will perhaps be more and more common to see Chinese companies as part of the Belt and Road Initiative transacting only in RMB, and other Asian countries following suit.

Currencies do not die with wars. However, history has shown that they have a massive impact on shaping and speeding up changes to the global financial architecture. The First World War heralded the collapse of the gold standard, and the end of the Second World War brought about the Bretton Woods set of institutions that underpinned the dollar’s reserve status, a system largely designed by John Maynard Keynes.

How will this conflict impact what future global financial structures look like? Current competing notions for dominance are instructive. We are now firmly in an us versus them context. The future of finance looks bifurcated and fragmented. One system will be the status quo of the USD reserve, traded largely in New York and London. The other could use the RMB alongside a number of other currencies, perhaps even a special drawing right of the New Development Bank. This more disjointed and evolving alternative system would largely be managed in the emerging financial centres of Shanghai, Singapore and Dubai.

China, up until now, has approached the internationalisation of the RMB with some trepidation. For the Chinese mix of command politics with a state-controlled market economy, control over the value and convertibility of the RMB has been seen to be more important than the political power, strategic sovereign autonomy (especially, as is now evident, foreign affairs) and influence accruing from full reserve status. This war could be the moment President Xi Jinping reconsiders this position.

Another long-standing stumbling block for an alternative to the dollar is the extremely unstable political relationships between those that might seek to oppose it. Though Russia, China and Pakistan are seemingly (at least momentarily) deeply aligned, India is at war with two of those would-be emerging partners.

Where this leaves middle-sized emerging nations such as South Africa is highly uncertain. Politically, since the war started the deep historical links to Russia and increasingly to China have become all too apparent. South Africa is siding with the East, and risks full-on pariah status from the West. President Cyril Ramaphosa and the ANC have brazenly confused, offended and infuriated long-standing and key strategic allies such as the EU and the US. It was unsurprising to see the New Development Bank and accompanying Chinese investors being far more evident at the recent South Africa Investment Conference than the World Bank or European Bank for Reconstruction and Development.

But these things are complicated. South Africa has deep economic, financial, cultural and historical ties to the West. The country is still, at least nominally, a democracy with the rule of law, unlike the autocracies of Russia and China and strongman democracy of India. South Africa’s advanced financial sector and corporates are deeply tied to hard-currency capital markets, global markets for trade and the dollar-based banking system of the West. A protracted period of divorce and eventual shift to a fragmented and unproven RMB-based financial order is practically unthinkable.

South Africa will in all likelihood try to cement its place as a commodity-exporting nonaligned country, such as Indonesia under Suharto during the Cold War. In theory, this would preserve access to capital and export markets, while retaining old political ties with the emerging hegemons in the East. Hedging bets could, however, prove to be considerably more complicated in the face of an increasingly assertive China and Russia. It remains to be seen how successful or sustainable this strategy will be. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.