March 24, 2022 - 1:15pm

It is a truism of history that war accelerates change. Events that were going to happen slowly, happen quickly. The most familiar example in recent history is the collapse of the British Empire.

After World War Two, Britain found itself heavily indebted to an America that did not want to be challenged on the world stage. The Empire did not last long after that. This example highlights another historical truism: worldwide financial arrangements play a large part in shaping political arrangements.

Yesterday, I published an essay in the policy journal American Affairs predicting that the economic war currently underway against Russia would result in the collapse of the US dollar as the global reserve currency, together with a vast diminishment of the euro and sterling as secondary reserve currencies. I argued that this would primarily be because of the Western countries confiscating Russian foreign exchange holdings.

In the essay, I argued that this would be a gradual process. Today we saw that process accelerate rapidly. Smelling weakness, Russian President Vladimir Putin has stated that Russia’s holdings of foreign reserves could be seized at a moment’s notice, and that he would only accept payment in roubles for energy exports from what he called “unfriendly countries”.

The effects of this in both the short-term and the long-term are likely to be profound. In the short-term, Europeans will have to enter currency markets and exchange euros for roubles any time they need to pay the electricity bill. This will mean that nearly €100bn a year will have to be converted into roubles.

In the medium term this will greatly bolster the rouble’s purchasing power relative to the euro, increasing European energy bills and boosting Russian exports to the region. The second effect will come when the Russians then turn around and dump these euros back into the market — to buy up renminbi, gold, commodities and so on. The Russians will do this because our sanctions have convinced them that euros are not worth holding. This will put further downward pressure on the value of the euro and cause it to decline against all these other assets.

The longer-term effects are even more important. Russia denominating its energy exports in its own currency or in an alternative to the dollar will signal to the rest of the world that, should they want to, they can do the same. Many will follow along.

Consider this chart of total annual oil production. In blue are countries I expect to continue trading oil in dollars, in orange are countries that I expect to immediately switch to alternatives and in grey are the countries that are likely to be on the fence. You need not be an energy market economist to see that the chart is evenly balanced. In the worst-case scenario up to two-thirds of oil producers could dump the dollar.

We are watching, before our eyes, the unwinding of the post-1945 US dollar-based global monetary system. It looks to me like the Russians and the Chinese have been planning this for some time. Our leaders, on the other hand, seem to have been completely caught off guard.

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics