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IMF warns Russia sanctions threaten to reduce dollar dominance in fx trade

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Financial sanctions imposed on Russia threaten to gradually dilute the dominance of the U.S. dollar and could result in a more fragmented international monetary system, IMF’s First Deputy Managing Director, Gita Gopinath told The Financial Times.

Russia has been hit with a plethora of sanctions from the United States and its allies for its late-February invasion of Ukraine. Russia has called the invasion a ‘special operation’ to disarm its neighbour.

“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 newspaper in an interview, adding that some countries are already renegotiating the currency in which they get paid for trade.

Already, Russian President Vladimir Putin issued a decree Thursday demanding payment for natural gas in rubles.

Putin talked tougher, saying Russia will start accepting ruble payments Friday and contracts will be stopped if buyers don’t sign up to the new conditions, including opening ruble accounts in Russian banks.

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“If these payments are not made, we will consider it a failure of the buyer to fulfil its obligations, with all the ensuing consequences,” Putin said.

However, Gopinath said that the war will also spur the adoption of digital finance, from cryptocurrencies to stablecoins and central bank digital currencies.

The IMF did not immediately respond to a Reuters request for comment.

Gopinath told the FT that the greater use of other currencies in global trade would lead to further diversification of the reserve assets held by national central banks.

She had earlier said the sanctions against Russia do not foreshadow the demise of the dollar as the reserve currency and that the war in Ukraine will slow global economic growth but will not cause a global recession.

In her reaction, the Chief Economist Africa Middle East at Chartered Standard Bank, Razia Khan noted that the US dollar dominance will only ever doing to head down the south, when is the question.

“USD FX reserves dominance was only ever going to head in one direction, to be fair. The question is whether it happens a lot faster now. Probably,” Khan wrote on her Twitter handle in response to the news.

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