The Ukraine Crisis Shaking the Global Monetary Order... 'Bretton Woods 3.0' Is Coming

[Asia Economy reporters Kim Hyunjung and Park Byunghee] The prospect of a new monetary order emerging after the war due to Western economic sanctions against Russia is gaining momentum. As the dominance of the US dollar weakens, the existing credit-based monetary order is expected to collapse, leading to the fragmentation of the global financial system. The yuan, which can absorb the shock of commodity price inflation, and the rapid rise of digital currencies such as Bitcoin have also been forecasted.

On the 31st of last month (local time), Gita Gopinath, the IMF’s Chief Deputy Managing Director, said in an interview with the Financial Times (FT), "Even in a fragmented financial system, the dollar will remain the most important currency, but it will certainly have a smaller share." She added, "Some countries are already reconsidering dollar payments in trade," and predicted that "the emergence of small currency blocs could be triggered."

◆Dollar-Centered Financial Order Cracks Triggered by Russia= In response to Western sanctions, Russia declared that it would only accept rubles for gas sales instead of dollars or euros, attempting to create cracks in the existing financial order. After being expelled from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) due to Western sanctions, Russia has been using its self-developed NSPK payment system. Russia developed NSPK in preparation for Western sanctions following the annexation of Crimea in 2014, and Russians continue to use Visa and MasterCard without disruption domestically. Russia has also discussed expanding the new payment system with countries such as Venezuela, Iran, and India. It has long made significant efforts to reduce its dependence on the dollar. Just before the invasion of Ukraine, the dollar’s share in Russia’s foreign exchange reserves was about 20%, significantly lower than that of other countries.

Deputy Managing Director Gopinath predicted that as other currencies are used more in global trade, the types of assets held by central banks will diversify. She said that countries tend to hold the currencies they trade in most as part of their central bank foreign exchange reserves. Gopinath explained that the dollar’s share in global foreign exchange reserves has already fallen from 70% to 60% over the past 20 years. She emphasized that China is leading other countries in the central bank digital currency (CBDC) sector and is promoting the international influence of the yuan. However, she predicted that the yuan is unlikely to replace the dollar. She pointed out, "For the yuan to expand its influence, conditions such as full convertibility and open financial markets are necessary." Gopinath also predicted that the war in Ukraine will accelerate the adoption of digital currencies such as cryptocurrencies, stablecoins, and CBDCs.

◆Zoltan Pozsar: "New Monetary Order to Emerge After the War"= Wall Street is also forecasting the emergence of a new monetary order after the war ends. The freezing of Russia’s foreign exchange reserves by Western countries has raised fundamental questions about "what exactly is money." Zoltan Pozsar, Credit Suisse’s investment strategist, recently explained in a report, "When the G7 countries froze Russia’s foreign exchange reserves, Bretton Woods 2.0 collapsed," adding, "We are witnessing the birth of Bretton Woods 3.0, a new monetary order."

The Bretton Woods system was an international monetary system established in 1944 at a conference of 44 Allied countries in Bretton Woods, New Hampshire, just before the end of World War II. It led to the implementation of the gold exchange standard with the US dollar as the key currency, known as Bretton Woods 1.0. However, in 1971, President Nixon ended gold convertibility, causing the collapse of the existing system. The US then shifted the monetary weight to "national credit," more precisely "credit in the US," based on its overwhelming military and economic power. This credit-based monetary system is known as Bretton Woods 2.0.

Pozsar viewed Russia’s invasion of Ukraine and the subsequent Western economic sanctions as the catalyst for moving to the 3.0 system. He particularly focused on China’s response and role, especially the changing status of the yuan in currency markets. Among the recent sharp drop in Russian commodity prices and the surge in non-Russian commodity prices, China appears to be an exception that can still purchase Russian commodities, potentially serving as a "backstop" for commodity inflation.

In this process, China is expected to adopt its own quantitative easing measures, such as selling US Treasury bonds or printing yuan to purchase Russian goods. If China monopolizes Russian goods and ships them in containers, international shipping rates will soar, which will lead to rising interest rates and worsening inflation in the West. Through this, the yuan’s value is also expected to rise after the war.

In the report, Pozsar stated, "In the commodity crisis situation, the People’s Bank of China (PBOC) is the only entity that can provide a backstop," and predicted, "After the war ends, the dollar will weaken further, and the yuan will strengthen." He also added, "‘Money’ after the war will not be the same as before, and Bitcoin (if it still exists) and others will be beneficiaries."

This content was produced with the assistance of AI translation services.