The Dollar's Threat Isn't The Euro Or Yuan
Russia's Economic Growth
Despite sanctions, Russia's GDP is now projected to grow by +3.8 percent, surpassing the US. This information comes from a discussion on Russia's War Economy by Eurointelligence. The Vienna Institute for International Economic Studies, a reliable source for economic data for central and eastern Europe, has increased their growth forecast for Russia this year by 0.6pp to 3.8%. This means Russia is growing faster than all western economies, including the US. However, growth is expected to slow down to 2.5% next year due to the impact of a 19% interest rate. Russia's economic growth is a typical example of a wartime Keynesian effect.
Comparing Russia's Economy to Europe's
It's interesting to compare Russia's economic progress with that of Ukraine's main supporters in Europe, who have entered into synchronized austerity, first in Germany, and now in France and the UK.
Russia's Fiscal Stability
One of the biggest surprises is Russia's fiscal stability. Defense spending is on track to reach 6% of GDP. However, the 2024 budget deficit is expected to be 1.5%, dropping to 1% in 2025. Vasily Astrov, the Russia expert at WIIW, concludes that Putin will have funds for the foreseeable future to continue financing the war against Ukraine. An increase in income and corporate tax means that Russia's state finance will become less reliant on energy.
The Impact of Financial Sanctions
Financial sanctions have not been as successful as once believed because money is not a natural global monopoly. International banks are certainly vulnerable to US dollar sanctions, but not all banks worldwide operate in dollar markets. The use of secondary sanctions has become a primary tool in the US's diplomatic toolkit in this century. However, it falls into the category of tools which lose their value the more they are used. The threat to the dollar is not the euro or renminbi, but the fact that micro-channels are becoming feasible as technology reduces friction.
Sanctions: A Lesson Learned
The more sanctions are relied upon, the less effective they become. This is the real risk to the dollar.
Why Sanctions Fail
On September 26, a post was made refuting the claim that sanction failures are due to a lack of political will. Another post on September 19, 2023, explained that sanctions don't work because they create new markets. A person who once praised the success of a buyer's cartel sanction now complains that the buyer's cartel is leaking.
US Sanctions and Their Consequences
US sanctions have backfired again, making China stronger. Russia's GDP is a clear indication of how misguided and overused sanctions have been.
Bottom Line
The real threat to the dollar isn't the euro or the yuan, but the overuse of sanctions and the emergence of new, viable micro-channels in the global economy. As technology reduces friction, these channels become more feasible, posing a significant risk to the dollar's dominance. What are your thoughts on this matter? Do you think the overuse of sanctions is weakening the dollar? Share this article with your friends and let's discuss. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
