Сук Джэ Джейсон Чанг

M5122-41.04.05

War and Cur r ency Statecr aft

Zoltan Poszar

Global Head of Short-Term Interest Rate Strategy, Credit Suisse

zoltan.pozsar@credit-suisse.com

Keywords: international monetary system, BRICS+, Eurasia,

commodity encumbrance, de-dollarization, international lender of last

resort, CBDC, Bretton Woods III

Background: Amid rising geopolitical tensions, threatening to rise to

levels not seen in at least a century, shifting political alignments reveal

the contours of an emerging order away from the unipolar, dollar-centric

world. Among these include the formation of the Belt and Road Initiative,

Eurasian Economic Union, SCO, INSTC, and the potential expansion of

BRICS. But it wasn’t until the outbreak of the special operation by Russia

in Ukraine that these parallel processes sharply accelerated, as a result of

the weaponization of the dollar, demonstratively used in the freezing of

over 300$ billion of Russian central bank assets. Simultaneously the

world is witnessing a decline in US-led dominance and legitimacy,

beginning with its disastrous withdrawal of troops out of Afghanistan in

2021 for the concentrations of resources on the Ukrainian conflict.

However the crux of their problems lies in the cost-push inflation that is

being caused by supply-chain disruptions that hitherto investors did not

1
 Сук Джэ Джейсон Чанг
M5122-41.04.05

have to worry about. The first was caused by the pandemic and the

second by geopolitical conflicts, both of which will only be prolonged to

exacerbate things for an already debt-burdened financial system.

Meanwhile Beijing’s strategic ambiguity shows that it will not

“abandon” Moscow because of Ukraine, but neither will they show open

support. Nevertheless geopolitical gestures like Xi’s year end visit to

Riyadh where the two leaders agreed to set up a “new paradigm of

all-dimensional energy cooperation” within a timeline of “three to five

years” which portend an end to the petrodollar have considerably raised

the stakes of the game. All of these trends are due to US insistence on

adherence to U.S. foreign policy for use of their financial system.

Consequently demand for alternative systems will only keep rising.

Methodology: This paper employs a cross-disciplinary translation of

causal relationships between financial institutional economics and current

geopolitical trends. The author employs his deep knowledge of the

shadow banking system and private money markets from his tenures at

the Fed, IMF, Department of Treasury to selectively gauge the relevance

of political events as they pertain to the more systemic developments of

the formation of key macro-regional trade and financial infrastructures.

Consequently, the breadth and scope of journalistic and academic

references are based on a more economic intensive analysis carried out in

2
 Сук Джэ Джейсон Чанг
M5122-41.04.05

previous dispatches. Furthermore, selection of references are done in such

a manner as to not only corroborate and elaborate on the underlying thesis,

that is the transition into a multipolar financial world, but also to provide

a framework for prognostication.

Research Focus: The research focus for this paper is twofold. Firstly to

measure political and diplomatic movements of and among countries

towards the formations of alternative financial and economic institutions

other than the existing US-dominated ones. This is done primarily by

tracking recent agreements to expand the already existing BRICS

organization, set in the historical context of Brzezinski’s concept of

“Eurasia” and Mackinkers’ concept of the “world-island”. Observations

are made as to the specific parameters that define compatibility of

candidate members to one or the other organization. These parameters are

at large indeed geographical and historical à la Brzezinski and Mackinder,

but are also drawn along the lines of preserving status quo alliance

relations regardless of geographical proximity (Singapore, South Korea).

Ultimately the three main blocks are divided between G7 + Australia”,

“BRICS+”, and “the non-aligned, while the absence of clear-cut divisions

are attributed to ongoing or potential wars. Although wars are mentioned

as a decisive contributing factor, the paper treats their occurrence as a

given and of secondary importance, placing a greater weight on what is

3
 Сук Джэ Джейсон Чанг
M5122-41.04.05

already becoming visible as its inevitable outcome.

The second main focus is to outline the main mechanisms of these

alternative institutions as well as the concrete circumstances from which

they stem. This is mainly done through the juxtaposition of the newly

emerging currency swap system between central bank digital currencies

(CBCDs) of BRICS+ countries based on a commodities standard, and the

existing fiat system run by the Fed and its private global systemically

important banks (G-SIBs).

Findings and Interpretations: The central finding that demanded the

most amount of argumentation was the link between the expansion of

BRICS and the possibility of an alternative platform for inter regional

trade. What is proposed as the main argument is the increase in credit

lines from Russia, China, and GCC countries to emerging market

countries, that may eventually be facilitated more efficiently once they

kick-start currency swap facilities based on central bank digital currencies.

The key currency of these swap lines will be the renminbi as reflected in

the China-GCC summit, as China new role as the international lender of

last resort is becoming more pronounced, as well as the potential linkage

between a petroyuan and the Shanghai Gold Exchange. The parallel

between existing swap lines between G7 countries and the emerging

People’s Bank of China swap lines is acutely made as that between a

4
 Сук Джэ Джейсон Чанг
M5122-41.04.05

system of over-leveraged and ultimately saturated economies, and

economies that have in the past decades have suffered a deficit of

investments and may greatly benefit from what may become a sort of

“Lend-lease” agreement of the 21st century.

This is the strongest argument against contemporary academics who

like Perry Mehrling who deny the end-of-the-dollar system and

undervalue the political factor of the above-mentioned deficit of

investments. It is not only that middle powers mentioned in this paper

like Saudi Arabia, Turkey, Brazil are striving for greater regional

leadership and hence a more independent policy on currency statecraft;

but the United States itself is proving more and more inadequate as it is

forced to disengage from its role as international liquidity provider to

assuage domestic discontent. Central bank digital currencies are also

touted as reflecting true multipolarity, as it will allow direct bilateral

transactions, in contrast to the current system where the dollar and euro

serve as invoicing currency of about 80% of all international transactions.

Conclusion: Although the magnitude of a potential new block of regional

powers doing trade in their local currencies besides the dollar is

overwhelming for just one research paper; this is the underlying

conclusion of this paper. The catalyst of this process is the trend towards

commodity encumbrance (collateralization of commodities) in a time

where the reserve currency of the world has not only drastically dropped

5
 Сук Джэ Джейсон Чанг
M5122-41.04.05

its inherent value, but has become fully weaponized, as in the case of

Russia. Weaponization of financial assets, may lead to weaponization of

trade, to all out war, necessitating the security of key commodities.

Recent years have seen an accelerated increase in qualitative and

quantitative growth of multipolar cooperation on these fronts. The main

one being the currency swap systems of CBDCs.

Policy Implications: The main policy implication for both private

investors and states is the inclusion of the geopolitical factor in any major

decision-making, be that in the diversification of investment portfolios or

central bank reserves. However in the case of states, policy implications

may be more specific. Direct mentions of the inevitability of more

Quantitative Easing and the futility of the introduction of CBCD in the

US are already stated. Meanwhile “non-West” countries that are

spearheading the “BRICSpansion” must comprehend the

all-encompassing transformations of their propositions for the system in

place - namely that it is an initiative that will work only in full

coordination of one with the other. The more ominous implications go for

the so-called “non-alligned” states that may find themselves considered

incompatible by one system, but not enough to join the other. Such a case

is illustrated by the example of South Korea.

6
 Сук Джэ Джейсон Чанг
M5122-41.04.05

Direction for Further Research: The preposition of a commodity based

financial mechanism to facilitate multipolar trade is considered the

logical and inevitable response of “non-West” countries to the systemic

crises being faced in the West - as discussed in previous dispatches,

revolving around the need to re-industrialize at low interest rates, while

dealing with cost-push inflation. Trajectory for further research would

thus demand corroborating these underlying theses while closely tracking

the parallel processes of de-dollarization, whether in the form of

“BRICSpansion”, the petroyuan, CBDC Bridge project, in a nutshell

Bretton Woods III.