August 06, 2014 U.S. Sanctions Erode Its Foreign Influence A few days ago the Leveretts looked at the effects of U.S. financial sanctions and the other ways the U.S. pisses off major countries. They find that the current path of U.S. foreign policy will erode the U.S. dollar hegemony and lead to a destruction of the "extraordinary privilege" (de Gaulle) the U.S. has had with the ability to print the world's reserve currency. The political erosion of the dollar will be felt in the commodity markets and especially in energy deals which will then have further effects in foreign relations: Petrodollars, Petroyuan, and the Ongoing Erosion of American Hegemony Looking ahead, use of renminbi to settle international hydrocarbon sales will surely increase, accelerating the decline of American influence in key energy-producing regions. It will also make it marginally harder for Washington to finance what China and other rising powers consider overly interventionist foreign policies—a prospect America’s political class has hardly begun to ponder. Sadly, only few will listen to the Leveretts but now Bloomberg picked up the theme: Russia Sanctions Accelerate Risk to Dollar Dominance While no one’s suggesting the dollar will lose its status as the main currency of business any time soon, its dominance is ebbing. The greenback’s share of global reserves has already shrunk to under 61 percent from more than 72 percent in 2001. The drumbeat has only gotten louder since the financial crisis in 2008, an event that began in the U.S. when subprime-mortgage loans soured, and the largest emerging-market nations including Russia have vowed to conduct more business in their currencies. “The crisis created a rethink of the dollar-denominated world that we live in,” said Joseph Quinlan, chief market strategist at Bank of America Corp.’s U.S. Trust, which oversees about $380 billion. “This nasty turn between Russia and the West related to sanctions, that can be an accelerator toward a more multicurrency world.” Some five years ago we already looked at this decline of the U.S. dollar as reserve currency and its effects: So far the U.S. could borrow cheaply and pay back less in real value than the original loan. That privilege is now going away. The trillions the U.S. currently needs to borrow from abroad will have to be payed back in full. That is a major change in its global power status and will seriously decrease its influence in international policy questions. The European Union which stupidly followed the U.S. sanctions on Russia with its own is also hurting itself: Financial interdependence offers a powerful opportunity for coercive diplomacy. But the unintended message Europe's leaders sent is that financial interdependence is a source of vulnerability that countries like Russia, but also China, Iran and others, would be wise to avoid.

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Europe's financial sanctions against Russia likewise add incentives for countries to look for alternative arrangements that reduce financial interdependence. Moreover, those incentives will only increase if the sanctions are successful. Even if Europe encourages the Russian government to change its policy toward Ukraine, the Russian government will respond over the longer term by seeking financial arrangements that leave it less exposed to such coercion. It will take years until the dollar will lose its reserve status but the decline is already visible. More and more deals are now made bilateral between partners in their own currencies and get settled outside of the financial channels the U.S. tries to sanction, block, spy on or to criminalize. The U.S. foreign policy reliance on sanctions, pressure and war is sawing off the high branch the U.S. is sitting on. Posted by b on August 6, 2014 at 16:12 UTC | Permalink Comments next page » next page »