NATO Expansion, Conflict in Ukraine, and De-Dollarization
Following the end of the Second World War, the North Atlantic Treaty Organization (NATO), a military alliance premised on a mutual defense pact, was formed to deter expansion of the Soviet Union and to suppress European militarism.[1] But, even after the fall of the Berlin Wall and the end of the Warsaw Pact, NATO continued to expand, to the dismay of many.[2] Scholars and other commentators have long predicted that further NATO expansion would be perceived by Russia as provocation and would increase the probability of Russian aggression in eastern Europe and the Caucasus.[3] These predictions came true in 2008 when Russia invaded Georgia after it declared its intent to join NATO, in 2014 when Russia annexed Crimea, and 2022 with Russia’s invasion of Ukraine.[4] Viewed on a longer time horizon, these events may all be seen as symptoms of a common cause.
The end of the Second World War also ushered in the era of the Bretton Woods financial system which oriented trade among participating nations around the convertibility of the US dollar into gold.[5] This system would eventually be formally disbanded, but the dollar has maintained its position as the dominant currency for international transactions.[6] As a result, the dollar has remained strong in spite of sustained US trade deficits[7] and a job market increasingly characterized by service jobs, which are generally low quality and low-paying.[8]
The expansion of NATO and the dominance of the dollar have mirrored one another, but the unipolar era with the US reigning as the world’s undisputed hegemon may soon prove to be an anachronism, with US foreign policy driving rivals into the arms of an expanding China.[9] As noted above, the dollar is still dominant, and no paradigm shift has taken place yet. But several examples illustrate that the global financial and trade order is in flux. China’s Belt and Road Initiative, the increasing coordination among the BRICS+ group of emerging countries, and, perhaps most significantly, the possibility of Saudi Arabia ending its longstanding exclusive sale of oil in dollars all threaten to undermine the hegemony of the dollar by providing alternative means of trade and payment settlement.[10] In addition, digital currencies may prove useful to other countries seeking to avoid standard currency networks altogether, by allowing central banks to bypass traditional financial channels facilitated by the dollar.[11]
The pandemic and the current conflict in Ukraine have driven even more urgent and concrete developments in de-dollarization. China and India have begun paying for Russian commodities in renminbi, rupees, and UAE dirhams, decreasing their need for the dollar and for dollar-recycling in the form of Treasury debt. These purchases have also provided proof to other countries in the BRICS and beyond that de-dollarization is a credible alternative.[12] Given that China has overcome the US as the world’s major trading partner for many countries, it seems likely that others will follow suit in order to more easily facilitate transactions.[13] Should these trends continue, the “exorbitant privilege” that the dollar enjoys may diminish, which would diminish the economic power of the US and the West.[14]
Proponents of capitalism have long argued that increasing global trade creates mutual dependence, thereby promoting peace and cooperation.[15] The United States, the West, and NATO should heed these arguments and tread carefully going forward in considering expanding its membership so as to avoid self-fulfilling prophecies of catastrophic global conflict with Russia and China. The US should proceed knowing that expanding a legally binding mutual defense pact up to the borders of Russia and backing it into a corner may not only have devastating short-term consequences in the form of nuclear war but may also generate long-term ramifications for the strength of the dollar, which undergirds our economy and which we take so easily for granted.
Peter Bonenfant is a staff member of Fordham International Law Journal Volume XLVI.
[1] Timeline of NATO expansion since 1949, The Associated Press (May 10, 2022), https://apnews.com/article/russia-ukraine-business-world-war-ii-sweden-finland-240d97572cc783b2c7ff6e7122dd72d2.
[2] Id.
[3] John J. Mearsheimer, Why the Ukraine Crisis is the West’s Fault, Foreign Affairs (Aug. 18 2014), https://www.foreignaffairs.com/articles/russia-fsu/2014-08-18/why-ukraine-crisis-west-s-fault; see also acTVism Munich, Chris Hedges & Noam Chomsky on Ukraine, NATO & Russia, YouTube (July 7, 2022), https://www.youtube.com/watch?v=NJ6T4uZGRTw; F. Stephen Larrabee, Ukraine: The Next Crisis?, RAND Corporation: TheRandBlog (September 7, 2008), https://www.rand.org/blog/2008/09/ukraine-the-next-crisis.html; Ted Galen Carpenter, Many predicted Nato expansion would lead to war. Those warnings were ignored, The Guardian (Feb. 28, 2022), https://www.theguardian.com/commentisfree/2022/feb/28/nato-expansion-war-russia-ukraine.
[4] See Carpenter, supra note 3.
[5] Carol Bertaut et al., The International Role of the U.S. Dollar, The Federal Reserve: FEDS Notes (Oct. 6, 2021), https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-s-dollar-20211006.html
[6] Id.
[7]Goods and Services, Balance of Payments, Federal Reserve Economic Data, https://fred.stlouisfed.org/series/BOPGSTB (last visited Mar. 3, 2023).
[8] Daniel Alpert and Robert C. Hockett, The Jobs Market Isn’t as Healthy as It Seems, Bloomberg News (Dec. 19, 2019), https://www.bloomberg.com/opinion/articles/2019-12-19/u-s-jobs-market-isn-t-as-healthy-as-it-seems#xj4y7vzkg.
[9] Zoltan Pozsar, Great power conflict puts the dollar’s exorbitant privilege under threat, Financial Times (Jan. 20, 2023), https://www.ft.com/content/3e05b491-d781-4865-b0f7-777bc95ebf71.
[10] Summer Said & Stephen Kalin, Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales, Wall St. J. (Mar. 15, 2022), https://www.wsj.com/articles/saudi-arabia-considers-accepting-yuan-instead-of-dollars-for-chinese-oil-sales-11647351541.
[11] See Pozsar, supra note 9.
[12] Id.
[13] Roland Rajah & Alyssa Leng, Watch China Overtake the US as The World’s Major Trading Partner, Lowy Inst. (Apr. 25, 2020), https://charts.lowyinstitute.org/charts/china-us-trade-dominance/us-china-competition/.
[14] See Pozsar, supra note 9; see also Nouriel Roubini, A bipolar currency regime will replace the dollar’s exorbitant privilege, Financial Times (Feb. 5, 2023), https://www.ft.com/content/e03d277a-e697-4220-a0ca-1f8a3dbecb75
[15] Erik Gartzke, The Capitalist Peace, 51 Am. J. of Pol. Sci. 166 (2007)
This is a student blog post and in no way represents the views of the Fordham International Law Journal.