05 Mar The Nuclear Dollar
“America has responded to Russia’s invasion of Ukraine by detonating the Nuclear Dollar, a weapon of economic devastation. Wielding it creates long-term consequences for America.” – The Lonely Realist
On May 3, 2019 (here) and again on September 13, 2020 (here), TLR discussed why countries America has sanctioned, notably Russia and China (The Axis of the Sanctioned), have been engaged in an undeclared war with America. The economic sanctions that America imposed on Axis nations have turned out to be feeble responses to their blatant aggressions. America talked loudly but carried a little stick. Sanctions were not an adequate deterrent. Their ineffectiveness incentivized further aggressions. President Bush in 2008 allowed Russia to hegemonize Georgia. President Obama in 2014 tolerated Russia’s absorption of Crimea and in 2015 Syria’s use of chemical weapons against U.S.-supported insurgents (discussed in The Failure of American Foreign Policy). President Trump in 2017 frivolously threatened North Korea with “fire and fury” for its nuclear and missile programs, praised Vladimir Putin in 2018 for his leadership and supported his barefaced denials at the Helsinki Conference over the evidence of America’s intelligence agencies, and threatened to pull America out of the NATO alliance. The last dozen years have evidenced numerous Axis examples of cyberattacks, assassinations, land grabs and weapons development programs explicitly directed at undermining American power. America’s leaders either ignored the threats or intentionally overlooked them …, which America’s enemies justifiably interpreted as signs of weakness. No wonder that Vladimir Putin invaded Ukraine in a further test of America’s resolve. It’s not surprising that he is challenging the ability of the rules-based West to address strong-willed autocrats. Moving deliberatively for the past 23 years to rebuild the Russian Empire, Putin continues to execute his agenda. It is only now that Americans are waking up to the realities of Putin’s and Xi Jingping’s global threats. The Axis is more openly waging war against America. Yes, Virginia, World War III started years ago. Americans chose to overlook the facts. The consequence is that WWIII has evolved from Cold War to Hot.
America, however, has a powerful weapon in its arsenal – the Nuclear Dollar. The US Dollar, you see, is the world’s Reserve Currency, the world’s medium of exchange (previously discussed by TLR here). That means that the central banks of other countries find it necessary – absolutely necessary – to hold significant quantities of Dollars so that they and their countries’ businesses can deploy those Dollars to engage in international trade and commerce. Dollars are the fuel that powers business operations and international economic activity. A country lacking access to Dollars is cut off from global trade. It either has to produce everything domestically – food, clothing, energy, manufactured goods, technology, commodities, etc. – or somehow barter domestic products for necessaries. Russia is a commodity-exporter. It is not and cannot become self-sufficient.
Russia’s 21st Century economy runs on the Dollars and Euros it receives from sales of oil and gas to Germany, Italy and other primarily Western countries. Those receipts fill Russian coffers and thereby enable Russians to purchase necessary foreign goods — food, clothing, manufactured goods, technology, etc. When Russian businesses sell their goods and services in Russia, they receive Russian Rubles. Because of the recently-imposed international sanctions that prevent Rubles from being converted into Dollars (as well as into Euros, etc.), Rubles today are almost worthless. The weaponized-Dollar last week was detonated by the U.S. to cut-off Russia and Russia’s central bank (as well as a number of Russia’s commercial banks and businesses) from international commerce. Make no mistake: doing so was the equivalent of a nuclear cataclysm visited on Russia’s economy. America’s allies in Europe and Asia have similarly cut Russia off from the Euro, Swiss Franc and Japanese Yen. The rules-based West sent the strongest possible message to Putin by exercising its nuclear economic option. It unleashed a weapon of immense destructive power, one that never before has been used. If the fallout is allowed to spread, the entire Russian banking system and many of Russia’s leading businesses will be bankrupted. Russian assets held in U.S. and Swiss banks have been seized, and Russia has been shut-out of the SWIFT payments system, the system that controls the wire transfer of Dollars. According to observers, these are “absolutely shocking steps.”
Dollars (and Euros, etc.) are not made of paper. They’re electronic notations that move from central banks to commercial banks, from commercial banks to businesses, from businesses to other businesses, and from businesses to individuals. SWIFT is the means by which those transfers are effected. The U.S. government has cut-off Russia’s central bank, and consequentially all of Russia, from those transfers and therefore from international commerce. The diabolical part of America’s strategy is that Russia can still collect the Dollars (and Euros, etc.) due it from its sales of oil and gas, but Russia and Russians no longer are able to spend those Dollars (or Euros, etc.). America’s goal is to strangle the Russian economy or, more precisely, to strangle Vladimir Putin, forcing him to abandon his imperial goals … or force Russians to abandon Vladimir Putin.
Although an excellent plan, there is no guarantee it will succeed. It also creates consequences for America.
America’s strategy prior to the Ukraine invasion was to provide Putin with possible exits that would forestall outright war. America fully disclosed its intelligence, including how it would respond to an invasion, in order to bring Putin to the negotiating table. Putin rejected America’s overtures. By publicizing Putin’s plans, America prevented him from dividing NATO and the American public through a disinformation campaign that would have established a pretext for invasion. The consequence is that he is now boxed-in by the facts, by America’s measured responses, and by the ability of a coordinated West (including a previously-reluctant Germany) to calibrate its response to Russia’s Ukrainian invasion. He has no graceful way out of that box. He can’t withdraw from Ukraine without admitting defeat and he can’t continue his onslaught without experiencing the economic disintegration of Russia. Expect him to lash out. Exactly how will soon be seen. America has now exhausted its heaviest economic weaponry. It has kept its military capabilities in reserve. It hopes it will not be called upon to use them.
Chinese policy will weigh heavily in deciding Russia’s fate. Should it so choose, China can barter with Russia to provide most of the products denied it by America’s actions. It also has the means to provide an alternative currency for Russia and other Axis nations – it is on its way to rolling out the digital Yuan and a Yuan payments system (CIPS) with the goal of challenging Dollar hegemony. The digital Yuan is designed to serve as an alternative for those seeking an internationally acceptable digital medium-of-exchange that is widely used, accepted in transactions involving the transfer of goods and services, and a store of measurable value. China therefore has the means to provide a level of protection against the adverse consequences of America’s Nuclear Dollar policies. Moreover, Ma Xue, a researcher linked to China’s civilian intelligence agency, last week wrote an article asserting that the U.S. and its European allies will suffer significant economic and social damage from their support of Ukraine. According to Ma, cutting off Russian banks from SWIFT damages Europe almost as much as it does Russia and will force the U.S. to provide economic and humanitarian aid to its European allies, weakening the Dollar. Europe, in addition, is likely to be destabilized by large numbers of fleeing Ukrainians (who currently exceed 1 million). “If the Ukraine refugee crisis is not properly handled, this will be conducive for Russia to sow hatred and sabotage NATO,” Ma wrote. “The fierce debate on refugee problems inside Europe could also damage its unity at crucial moments.” EU destabilization has long been a Putin priority (as his Brexit success demonstrates).
America enjoys an “exorbitant privilege” from the Dollar’s status as the world’s Reserve Currency. By arming and launching the Nuclear Dollar at Russia, America has shown the world the potency of the Dollar weapon. The fact that America has deployed it against Russia surely will motivate other member of The Axis (as well as others) to find an alternative.
Finally (from a good friend)