The US government's decision to apply more sanctions on Russia is a grave
mistake and will only escalate an already tense situation, ultimately harming
the US economy itself. While the effect of sanctions on the dollar may not
be appreciated in the short term, in the long run these sanctions are just
another step toward the dollar's eventual demise as the world's reserve currency.
Not only is the US sanctioning Russian banks and companies, but it also is
trying to strong-arm European banks into enacting harsh sanctions against
Russia as well. Given the amount of business that European banks do with
Russia, European sanctions could hurt Europe at least as much as Russia.
At the same time the US expects cooperation from European banks, it is also
prosecuting those same banks and fining them billions of dollars for violating
existing US sanctions. It is not difficult to imagine that European banks
will increasingly become fed up with having to act as the US government's
unpaid policemen, while having to pay billions of dollars in fines every
time they engage in business that Washington doesn't like.
European banks are already cutting ties with American citizens and businesses
due to the stringent compliance required by recently-passed laws such as
FATCA (Foreign Account Tax Compliance Act). In the IRS's quest to suck in
as much tax dollars as possible from around the world, the agency has made
Americans into the pariahs of the international financial system. As the
burdens the US government places on European banks grow heavier, it should
be expected that more and more European banks will reduce their exposure
to the United States and to the dollar, eventually leaving the US isolated.
Attempting to isolate Russia, the US actually isolates itself.
Another effect of sanctions is that Russia will grow closer to its BRICS
(Brazil/Russia/India/China/South Africa) allies. These countries count over
40 percent of the world's population, have a combined economic output almost
equal to the US and EU, and have significant natural resources at their disposal.
Russia is one of the world's largest oil producers and supplies Europe with
a large percent of its natural gas. Brazil has the second-largest industrial
sector in the Americas and is the world's largest exporter of ethanol. China
is rich in mineral resources and is the world's largest food producer. Already
Russia and China are signing agreements to conduct their bilateral trade
with their own national currencies rather than with the dollar, a trend which,
if it spreads, will continue to erode the dollar's position in international
trade. Perhaps more importantly, China, Russia, and South Africa together
produce nearly 40 percent of the world's gold, which could play a role if
the BRICS countries decide to establish a gold-backed currency to challenge
the dollar.
US policymakers fail to realize that the United States is not the global
hegemon it was after World War II. They fail to understand that their overbearing
actions toward other countries, even those considered friends, have severely
eroded any good will that might previously have existed. And they fail to
appreciate that more than 70 years of devaluing the dollar has put the rest
of the world on edge. There is a reason the euro was created, a reason that
China is moving to internationalize its currency, and a reason that other
countries around the world seek to negotiate monetary and trade compacts.
The rest of the world is tired of subsidizing the United States government's
enormous debts, and tired of producing and exporting trillions of dollars
of goods to the US, only to receive increasingly worthless dollars in return.
The US government has always relied on the cooperation of other countries
to maintain the dollar's preeminent position. But international patience
is wearing thin, especially as the carrot-and-stick approach of recent decades
has become all stick and no carrot. If President Obama and his successors
continue with their heavy-handed approach of levying sanctions against every
country that does something US policymakers don't like, it will only lead
to more countries shunning the dollar and accelerating the dollar's slide
into irrelevance.
