2022 started with a surging omicron variant. A few weeks in, providing a respite, the variant subsided around the globe. However, as if the world was deprived of tragedy and was rejoicing for too long, weeks later, Russia invaded Ukraine, leading to death and destruction in Ukraine and economic turmoil around the globe. 

Russia’s invasion of Ukraine is not comparable to any other invasion in history due to its geoeconomic significance. Both Ukraine and Russia are leading exporters of commodities such as crude, natural gas, iron and steel, wheat, and edible oils that have a direct impact on the inflation levels in major world economies. 

While economists were concerned about a significant drop in consumption levels arising from COVID-19-related lockdowns and suppression of demand sending crude prices to $0 per barrel two years ago, now they are concerned about the exact opposite — skyrocketing crude prices touching more than $130 per barrel and natural gas hitting $5.7 per metric million British thermal units (MMBtu). 

There were also price increases on wheat, edible oils and other commodities with the potential to directly impact the average Joe not just in the U.S. and Western world but in the global south, where inflation shocks are even more acute. 

Adding fuel to fire, the U.S. chose the worst possible weapon to deter Russia — economic sanctions. By sanctioning Russia, the world’s third-largest producer of crude and largest supplier of wheat, the U.S. has set off dynamite that could burst into a recession in the next six months, as several economists have predicted. 

However, the long-term challenge for the U.S. will be to keep the crown on the U.S. dollar’s head as the leading global reserve/fiat currency. The unilateral sanctions of the West against Russia had the unintended consequence of raising inflation levels in Europe, East Africa and South Asia, which were the largest importers of Russian wheat and energy. Given that seeking alternatives and establishing substitute supply chains takes time and capital, most economies are establishing different mechanisms to circumvent the sanctions. These range from using barter trade to trading in their own currencies over the dollar. 

The latter is igniting a debate on the use of the dollar for global trade. Not necessarily among America’s steadfast allies but more so with countries that are on the fence about America’s global interventions. Countries such as Brazil, China, South Africa and India that are part of the BRICS grouping make up more than 24 percent of world gross domestic product (GDP) and 16 percent of world trade. Similarly, in Africa, which makes up 3 percent of global GDP and is predicted to grow six times in size by 2050, many countries will likely reconsider dollar trade. 

Developing nations and emerging markets economies cannot easily absorb inflation shocks. In a few of these economies, rising inflation levels could lead to a balance of payment crisis and even the toppling of their respective governments. Hence, it is natural for these economies to seek ways to circumvent America’s sanctions. Even Europe, one that is part of the Western alliance, has sought ruble-euro trade arrangements to prevent any disruptions in Russian gas supply. From Europe’s standpoint, in particular from Italy’s and Germany’s, Russian gas keeps factories running and homes lit. Without Russian gas, their economies would come to a standstill. Therefore, it is with an urgency that they establish alternative mechanisms. 

Moreover, this experience could place Europe at a crossroads — prioritize the transatlantic alliance and blindly bandwagon the U.S., even if it were to cost it economically, or put European economic interests first over relations with its transatlantic partner. 

The impacts of these sanctions are even more profound in the global south. For example, India imports more than 80 percent of its crude demand and the rise in prices will convert to inflation and even a balance of payment crisis if it buys at current market levels. Understandably, when Russia offered to sell its crude at around a 30 percent discount to the market price, it was rational for the government to consider that proposal. 

Earlier this month, in his speech, Putin spoke of diversifying reserve currencies to national currencies, gold and other commodities. It may not be just Russia that would consider diversifying reserves. Countries in East Africa and South Asia that have been indirectly impacted by the sanctions and could very well be facing secondary sanctions will look toward other assets. 

While American international relations scholars and economists may fail to see America beyond the chimera of the city on the shining hill, countries of the global south might be less in love with American exceptionalism and could seek alternatives to the dollar. 

The hegemony of the U.S. dollar was reliant on America’s hegemonic status in the world. With the world moving toward multipolarity and with the U.S. no longer the world’s largest trading nation (it is China) the power and status of the dollar could be waning as well. Given the increasing role played by China, the European Union and other countries of the global south, the dollar might just be witnessing its descent. 

It is a matter of when the U.S. dollar loses its dominance among global currencies, not will. The economic sanctions following the Russian invasion could have just accelerated that downfall. 

Akhil Ramesh is a fellow with the Pacific Forum. He has worked with governments, risk consulting firms and think tanks in the United States and India.