Rewind: War, dollar and new order

The war in Ukraine is a result of the continuation of murky aggression — a clash of two powers, backed by Western oligarchs on the one hand and Russian’s on the other

By Prof R V Raman Murthy

Hyderabad: The Ukraine War, which went through its anniversary on February 24, seems to be leading to a long grinding destruction than peace for the Ukrainians, and is the saddest development. The US has managed to get Europe behind to arm Ukraine more to fight its war with Russia.

Ukraine has reportedly lost a majority of its trained army, and is short of equipment and air power. The economic cost of destruction is about $1 trillion — most of Ukraine’s industry, power plants, agricultural fields, roads, bridges and rail lines are decimated, along with urban infrastructure. More than 10 lakh resourceful Ukrainians have fled, leaving behind less resourceful. Sixty per cent of its population is living in dark and cold winter without gas and electricity. The economy has contracted by 60% in the last three years, beginning with the pandemic. The West is now arming it with an aid of about $40 billion, to ruin it further in its attempt to regain lost territories.

Russia too might have lost about five hundred thousand, the beleaguered bear can afford to throw many more. Doesn’t common sense suggest discretion about peace is the better part of valour? But, there are no signs to call for peace, though Russian President Vladimir Putin declared ending the nuclear treaty with the US. We need to find answers to this desperate protracted war. There must be deeper reasons.

Bilateral Belligerence

We have entered the era of post-globalisation under declining US hegemony. The future of capitalist development is threatened by two major factors regarding its sustainability. First, the humongous inequality under corporate capitalism in the past three decades and second, climate. Both are largely determined by the neoliberal order under global oligarchs and the US stewardship. The world received a false promise that there would be a peaceful development after the fall of the Soviet Union and the Eastern Bloc. Senior Bush, Hollande and Kohl promised Gorbachev that the West won’t gobble the former subjects of Russia and wind up NATO (North Atlantic Treaty Organisation), which has no meaning in a post-socialist threat.

Though the Gold Standard system served as an international payment mechanism to connect hinterlands to global trade, it resulted in extremely vulnerable conditions for deficit countries and latecomers into imperialist capitalism

On the contrary, in the absence of countervailing power, the US-led West began destroying nations to capture their natural resources. They inducted 13 countries of the old-Soviet bloc, much to the chagrin of Russia. The ongoing war in Ukraine too is a result of the continuation of this murky aggression. Not a unilateral one, but a bilateral, clash of two powers, backed by their respective oligarchic interests —  Western oligarchs on the one hand and the Russian oligarchs on the other.

Further, the Western oligarchic alliance has also started a new Cold War against China, a new potential rival in the global race. The prospects of peaceful development are damned for the moment and the fate of several countries in the periphery hangs in the air perilously; many are on the verge of collapse.

Three Economic Fallouts

However, there are three important economic fallouts, with mixed prospects for the world. First, the US is now recognised as a global rentier for lending its dollar to the world and taking its pound of flesh. Second, the sanctions posed against Russia have not only failed but are also laying new pathways for an alternative payment mechanism. And third, the oligarchic nature of the current global order underlies the chaotic nature of development.

US’ share in global production fell to 18%, but the world began using dollar for 83% of transactions

• The Rise of Dollar

The present-day dollar-dominated flexible exchange rate system had assumed ascendency in the globalisation phase after the Soviet collapse in 1989. It indeed replaced the Dollar-Gold Standard during 1950-71, which itself had replaced the century-old Gold Standard of 1847-1940. There had been a search for a stable global exchange rate regime without much success.

The Gold Standard system, which was based on fixing currency levels to gold reserves, though served as an international payment mechanism to connect hinterlands of the world to global trade, resulted in extremely vulnerable conditions for deficit countries and latecomers into imperialist capitalism. This became one of the reasons for the two world wars, and it was resolved that the US would lend its surplus dollars at fixed arbitrage to countries for settling the balance of payments, known as the Bretton Woods agreement, under the aegis of John Maynard Keynes. However, the US suspended it for not being able to see the growth of others through trade, for free, and they acquired gold, while the US savings kept dwindling.

When President Richard Nixon wanted more budget for his Vietnam War but could not raise enough loans for having to maintain a fixed dollar ratio, he raised curtains for a different game. He suspended dollar-gold conversion and made it open for sale in the floating exchange market. He declared that the dollar will now be the problem of the world, not just the US alone, and it did really become one, after three decades.

While unilateral suspension of Russian accounts from SWIFT sent chills to oligarchs and nations which use dollar as a reserve currency, it is compelling a lot of countries to look for alternatives

The riches it gained in earning the arbitrage became the source to drive the US economy. It encouraged consumption to make the American Dream work while outsourcing production to China to benefit its capitalists. Its dollars from other countries began financing its consumption and the US became a net consumer of the world’s goods and services than being a producer. Its share in global production fell to 18%, but the world is still using the dollar for 83% of transactions of goods and services, which are produced outside the US. This is simply for not having an equivalent stable and valuable alternative currency. In the process, the US became a financier, collecting interest, arbitrage and differential rent, not a supplier of technology or raw materials or final goods.

Further, the US needed the global dollar reserves to be invested in Federal treasury bills, crucial for raising its public debt, as its own domestic savings dwindled in its macroeconomic strategy of boosting consumption through its credit instruments. The ever-appreciating dollar against exporting countries kept goods available cheaply for the US public, raising their living standards despite falling real incomes. These global surpluses are being used to finance the consumption of the US, instead of financing the production of nations.

Nations needed finance to undergo conditionalities of keeping floating exchange rates, for the so-called correction of their balance of payments, without any success. Thus, the dollar-dependence pushes countries into the abyss of ever-rising external debt. The speculative capital flows are playing havoc with the currencies of the world, draining their surpluses constantly and making them unviable wastelands. Unless they find an alternative, the future of the development of nations is in peril.

The ruble trades around the same 75-per-dollar rate seen in the weeks before the war, though Russia is using capital controls to prop up the currency

• Sanctions Backfire

The sanctions imposed by the Western powers on Russia have severely backfired and are threatening to send the global economy into a deep recession. The economic sanctions are expected to impose a prohibitive cost on Russia for its adventure in Ukraine. But the decision is taken with such ignorance of ground realities, where Russia is a major source of natural resources in the world, more importantly, to Europe.

Further, Russia is suspended from the global banking system, referred to as SWIFT, freezing its assets to the tune of $290 billion. Most of these belong to Russian oligarchs. These two actions led the ruble to crumble by over 50% in two days before Putin made an astonishing move. He made payment in ruble compulsory for Europe to buy gas in the very week. To everyone’s surprise, Russia managed to recover the ruble by 80% in the international market within two days.

Russia’s economy this year is projected to outperform the UK’s, growing 0.3% while the UK faces a 0.6% contraction, according to IMF

The unilateral suspension of Russian accounts from the SWIFT system sent chills not only to the oligarchs of the world but also nations which use the dollar as a reserve currency to park in US Treasuries, compelling them to look for alternatives. Countries like Brazil, South Africa, China, India and Russia have begun talks to evolve an alternative multilateral payment mechanism away from the dollar. Even Saudi Arabia is keen to join. Thus de-dollarisation is a significant development to challenge the US hegemony in global capitalism.

• Oligarchies

Multinational capital, in its ever-increasing inequality frame, is creating multinational oligarchs. The alliances and combinations appear varied, which manifests varying geopolitics. Oligarchs close to US Republicans have greater proximity with oligarchs of Putin. Russian oligarchs are trying to usurp world oil and gas reserves, by sending its Wagner private mercenaries. American private militias are also operating with similar objectives. Indian oligarchs are working with Russian oligarchs to sell their oil. Thus, global inequality has resulted in global oligarchs and true configurations are not exactly clear. These pose the greatest dangers to democracies and the rights of workers and ordinary people.

More than 30 countries, including the US, EU nations, the UK, Canada, Australia, Japan and others — representing more than half the world’s economy — are part of the unprecedented sanctions imposed on Russia

To conclude, the Ukraine war is the first tragedy in the new decade, which is a result of a desperate attempt by the US to keep its dominance. War is no option for Ukraine, but it is caught in a log jam, and no other voice is allowed in the chaos. Russia too feels desperate to fight back for its lost glory. The sanctions imposed to destroy Russia, are, in fact, destroying the world. The resulting inflation, recession, trade deficits and devaluations are rocking economies.

The world is forced to search for alternatives to the dollar, which has become a means to squeeze the world. Ruble’s resurrection has shown the way. However, the growing oligarchic nature in the past two decades is proving a double whammy for the common man, who is hammered from all sides in all countries.

(The author is Professor, School of Economics, University of Hyderabad. rvramana66@gmail.com)