Dollar heg is resilient because of geopolitics, not economics.

The sanctions against Russia are contributing to a realignment of global currency holdings. The countries supporting sanctions on Russia have strong geopolitical incentives to continue holding and using dollars for international reserve and payment purposes since doing so reinforces the constraining impact of the sanctions and helps ensure their future effectiveness. Any economic incentives these governments previously had to diversify away from traditional currencies, particularly the U.S. dollar, by increasing the proportion of other currencies in their reserves and international transactions must now be weighed against the geopolitical incentives to hold dollars. As security concerns eclipse economic ones, the United States and Europe are limiting their economic dependence on foreign adversaries and pushing to relocate manufacturing and supply chains to allied nations in what has come to be known as “friend shoring.” Just as countries are beginning to source goods and inputs from friendly nations, they are likely to adopt the currencies of friendly nations. The size of the sanctioning coalition, the number of nonparticipating sanctions supporters, and the number of countries under the U.S. security umbrella, make large-scale currency diversification away from the dollar unlikely, as shown by two recent studies.

Together, the coalition arrayed against Russia accounts for more than 90 percent of global currency reserves, approximately 80 percent of global investment, and 60 percent of world trade and world economic output. Overcoming that dominance would be difficult even if every country that has declined to sanction Russia fell in line behind an organized anti-dollar coalition.

Countries not participating in sanctions against Russia do not necessarily disagree with the goals behind them: ending the war in Ukraine and deterring future territorial aggression. And many of those countries still have incentives to strengthen the global dollar-centered system. Fully half of the United States’ formal security allies are not participating in the sanctions regime against Russia. Together, this group of countries, which includes Argentina, Brazil, Chile, Pakistan, the Philippines, Thailand, and Turkey, represents six percent of the world’s GDP, seven percent of global trade, and two percent of global investment. Developing countries that have not sanctioned Russia are feeling the brunt of the sanctions’ secondary effects: inflation, currency depreciation, and supply chain shortages. Still, they are unlikely to respond to this fallout by siding with Russia unless the West inflicts further pain on them—for example, by diverting aid to Ukraine and cutting off foreign aid to them.

With geopolitical tensions rising, it is likely that an old security logic for the use of the dollar will take hold. Historically, allies have offered currency support in exchange for defense commitments. Most famously, the United States stationed 200,000 troops in West Germany during the Cold War. In return, President John F. Kennedy asked Berlin to procure military equipment as a way of reducing the U.S. current account deficit, supporting the dollar, decreasing the outflow of gold, and bolstering the credibility of the fixed dollar-gold regime arising from U.S. military spending. When security concerns receded after the Cold War, economic calculations took over, with geopolitics taking a back seat in determining dollar holdings and transactions. But with Russia’s invasion of Ukraine, the security drivers of economic exchange have returned with a vengeance.

BUCK UP

Great-power competition poses serious risks to the dollar’s dominance in the global economy. Geopolitically induced dollar support is, however, working to stabilize and increase dollar holdings. The coalition behind the sanctions against Russia is broad, wealthy, and militarily powerful, and its objective of ending Russia’s barbarous war is widely shared, even by those not participating in the sanctions. And even though many countries look on the sanctions against Russia with alarm, they have other geopolitical reasons to support the dollar. For in a less secure world, countries privilege survival and are more likely to support states capable of helping them secure their territorial integrity, giving the United States an edge because of its vast security network.