The IMF warns of the US dollar losing dominance after sanctions

Gita Gopinath, first deputy managing director of the International Monetary Fund (IMF), has warned of a gradual decrease of the dominance of the US dollar in the world financial systems after the unprecedented financial sanctions imposed on Russia after its incursion in Ukraine.

The sanctions, from restrictions on Russian banks to measures targeting its economy, imposed by Western nations, could cause a more fragmented international monetary system.

“The dollar would remain the major global currency even in that landscape, but fragmentation at a smaller level is certainly quite possible,” Gopinath told the Financial Times. 

“We are already seeing that, with some countries renegotiating the currency in which they get paid for trade,” she added.

Ahead of sweeping Western sanctions, Russian President Vladimir Putin said on Thursday that he had signed a decree saying foreign buyers must pay in roubles for Russian gas from April 1.

The contracts would be halted if these payments were not made.

"In order to purchase Russian natural gas, they must open rouble accounts in Russian banks. It is from these accounts that payments will be made for gas delivered, starting from tomorrow," Putin said.

"If such payments are not made, we will consider this a default on the part of buyers, with all the ensuing consequences. Nobody sells us anything for free, and we are not going to do charity either — that is, existing contracts will be stopped."

The decision is the last step of Russia’s long campaign to reduce its dependence on the dollar. 

Although the US currency has an outsized role in global markets, its dominance has been gradually decreasing in the last two decades.

According to a recent IMF report on dollar dominance in global markets, “the share of reserves held in US dollars by central banks has dropped by 12 percentage points since the turn of the century, from 71 percent in 1999 to 59 percent in 2021.”

The decline of US dollar dominance is not the result of reserve accumulation by a small number of large reserve holders with a preference for non-dollar currencies.

Rather, the IMF sees the active portfolio diversification by central bank reserve managers as the main reason for this decline.

The share of nontraditional reserve currencies, defined as currencies other than the US dollar, euro, Japanese yen and British pound sterling, rose from negligible levels at the turn of the century to roughly $1.2 trillion and 10 percent of total identified reserves in 2021.