Are Sanctions Hurting the Dollar?
“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 told Newsweek. The greenback stands in a class of its own as the most popular and robust currency across the international banking system, outsizing its next largest competitor, the euro, by a factor of nearly three to one. When it comes to currencies, the dollar is by far the world's safest best. But this could be changing.
The continual use of sanctions to pressure countries and companies perceived to be acting against U.S. interests may also be weakening the dollar's global position. "It's certainly not an imminent threat to the dominance of the dollar, but it's by far the biggest one," Benn Steil, senior fellow and director of international economics at the Council on Foreign Relations, told Newsweek. In a time of major market disruptions due to global pandemic, Steil used a medical example to illustrate how the overuse of sanctions is actually making the malady worse.
"Antibiotics can be very powerful against certain types of bacteria,"Steil said, "but as you know, if you overuse them on a population, strains of the bacteria develop that are resistant to the antibiotic. And that's exactly what we're seeing now." Even as a number of experts sound the alarm, the tantalizing convenience of simply prescribing these economic restrictions as a one-fits-all cure is losing its effect, and at the same time, empowering the opposition. "When you use this particular tool to the extent that we're using it," Steil said, "you can expect that it becomes more and more cost-effective for the countries that are affected to look for alternatives."
While the dollar is likely to remain the currency of choice in the world banking system for some time, these alternatives are multiplying and improving as Washington's peerless position is increasingly questioned by friends and foes alike. The U.S. practice of boycotting adversaries dates back centuries, but the wholesale use of such measures coincides with the rise of the dollar as the world's reserve currency in the final years of World War II. The conflict imposed a devastating toll on the old colonial powers of Europe and paved the path for a new economic empire to rise—unbridled U.S. capitalism. Washington's literal money-making machine would outlast its top rival, the Soviet Union, and launch it into a new era of economic supremacy through the turn of the 21st century.
Today, the dollar accounts for around 60% of foreign exchange reserves, easily topping the euro's estimated 21% and dwarfing the Japanese yen (6%), the British pound sterling (4.7%) and other currencies in the single digits, according to the latest figures from the International Monetary Fund. But the U.S. is not unmatched in all economic measures. China is on a fast track to become the world's largest economy, even as its currency comes in at roughly only 2.25% of foreign exchange reserves. Coinciding with Beijing's rise is an onslaught of new sanctions from Washington targeting the People's Republic for a laundry list of alleged human rights abuses.
As has been the case with other targets of U.S. sanctions, however, experts are uncertain as to whether such measures actually contribute to what Washington would see as positive changes in the behavior of the intended target. But there is no such uncertainty about one effect of those sanctions: They harm their target. Steil says that alone should not be confused for a decisive victory.
"We often choose to mistake other countries' pain for achieving our aim," Steil said. "In other words, when we impose financial sanctions on other countries, it's usually to change their foreign policy. But in the vast majority of cases they don't actually do that." The pain is felt mostly by civilian populations, especially in blacklisted countries like Cuba, Iran, North Korea, Syria and Venezuela. Though sanctions have won political points at home for U.S. administrations, this is little evidence that the targeted countries shifted or abandoned undesirable policies of governments in response to economic coercion.
Instead, the U.S. has seen leading strategic competitors China and Russia, and even allies and partners like Turkey and India, increasingly swing their economic weight in the direction of trading in their respective national currencies when it suits their interests. The dollar remains on top, but countries are beginning to question the degree to which U.S. financial institutions serve as intermediaries—or gatekeepers—for international banking.
"The U.S., by continuously using sanctions, is beginning to cut off its nose to spite its face," Anuradha Chenoy, formerly the dean of Jawaharlal Nehru University's School of
International Studies in New Delhi, told Newsweek. "History has repeatedly shown that sanctions do not impact power elites and the ruling regimes. Their impact is felt by ordinary people and more so by legitimate businesses." As other countries increasingly wield their own financial clout, she argued that it is time the U.S. rethinks its approach.
Despite this resistance, however, trust in the U.S. dollar remains high, and so far it has weathered a slew of financial crises, including the COVID-19 pandemic. That being said, like virtually all currencies, it's only worth the amount people are willing to believe in it, and overconfidence could serve as a blind spot to policymakers not paying close attention should the winds shift.”