Not all economic statecraft is created equal

Matthew Blake is head of the Centre for Financial and Monetary Systems, and Matt Strahan is lead for private markets initiatives, both at the World Economic Forum

As one of his last official acts, in December US President Joe Biden approved the transfer of $20bn to a new World Bank-administered fund for Ukraine. This transfer is part of a larger $50bn loan package by the G7 to support Ukraine’s “budgetary, military and reconstruction assistance”. 

The funding package is backed by the future interest proceeds of nearly $300bn in Russian sovereign reserves, which have been immobilised in western financial institutions since the country’s invasion of Ukraine in February 2022. 

The G7’s historic decision was finalised and announced in September of last year on the sidelines of the annual meetings of the IMF and World Bank. The gatherings, which bring together the who’s who of global finance, perhaps best represent the western-backed financial system that the G7 nations dominate. 

At the same time, heads of state from across the global south, including China and India, gathered more than 5,000 miles away in Kazan, Russia for the 2024 Brics Summit. 

This summit, the first to be hosted by Russia since the invasion of Ukraine, convened the leaders of the growing Brics bloc, now representing nearly half of global population and a quarter of global economic activity. 

US dollars versus gold Brics

The symbolism of these two parallel events — the first, the physical manifestation of the western-constructed Bretton Woods financial system, and the second, of an emergent global majority positioning itself as an alternative to the current western, US dollar-backed financial system — was clear. 

But the 2024 Brics Summit was about more than just symbolism. Russian President Vladimir Putin used the gathering to promote BRICS Bridge, an international payments network which would serve as an alternative to existing western institutions, notably the Swift system. The 2023 summit saw a related proposal for a new Brics currency. 

The proposals would enable members to transact outside of the US dollar and broader western financial system, and come as a response to the restrictions and sanctions placed on Russia following its invasion of Ukraine. 

These saw the US and its allies expel Russian banks from Swift, freeze Russia’s foreign currency reserves, and use other actions to limit the country’s ability to finance its war. 

Such actions were unprecedented in modern history and arguably have had mixed results. Importantly, however, they raised alarm bells in capitals across the global south, many of which do not fully follow the western stance on Ukraine. 

As revealed in the terms of the G7’s funding package, we see both a shift in economic power and that western leaders now understand a key message — not all acts of economic statecraft are created equal.

Red lines of the global financial system

The Russian sanctions represented an escalation in the use of the financial system to advance geopolitical ambitions. States, particularly emerging “unaligned” powers, saw what it meant for the west to control the levers of financial power — and they did not like it. 

Their subsequent flirtation with alternative payments platforms and reserve currencies shows that using the financial system to achieve foreign policy objectives risks fragmenting it into discrete, geopolitically aligned blocs. 

By using the financial system in this way, policy-makers risk jeopardising its very survival.

Companies are already facing consequences, with examples ranging from private equity companies being unable to exit investments in China through IPOs to global financial institutions segmenting operations across geopolitically aligned blocs, or even breaking apart entirely. 

The costs also extend beyond financial institutions to the real economy. New analysis from the WEF suggests that very high levels of fragmentation could cost the world economy more than 5 per cent of current global GDP.

This fragmentation will also lead to liquidity shortfalls and higher levels of inflation, meaning that emerging markets and developing economies are likely to bear the burden. 

To protect the global financial system, leaders must identify red lines for actors across the globe. 

The seizure of foreign sovereign assets is one recent example. Earlier this year, Bloomberg reported that the G7 planned to seize nearly $300bn of Russia’s frozen assets to support Ukraine. Saudi opposition led to the G7 softening these plans, which resulted in last year’s loan agreement. 

By collateralising instead of seizing Russian assets, the G7 took a decisive yet softer approach than originally proposed. So far, there’s been no direct comment from Saudi Arabia. 

This change not only reflects the increasing power of emerging players like Saudi Arabia, but also that the G7 clearly came up against a line in the sand: you may be able to freeze sovereign assets, but not necessarily seize them. 

Why building a multilateral consensus is the way forward

Identifying red lines and guardrails need not undermine national sovereignty or disempower states from regulating and policing the system. 

This week, WEF is proposing a new framework for action by putting forward a set of principles that can protect the financial system’s functionality and integrity amid rising geopolitical tensions. Developed with over 25 global finance leaders, these eight conditions include respect for the rule of law and property rights, and avoiding the unilateral expropriation of sovereign assets, among others.

Ultimately, the western-led system is unlikely to be replaced in the near term. The system’s strength, including its perceived stability and commitment to principles like the rule of law, make it the best of an imperfect set of options. 

US President Donald Trump has also threatened to impose tariffs on countries who seek to undermine or move away from the US dollar, both showing the increasing salience of these issues and potentially revealing a red line for the US — de-dollarisation. 

But, as population and economic growth increasingly shift from the G7 to the new global majority, it will be essential for policy-makers to use multilateral decision-making to clearly articulate red lines and ensure they are not crossed. 

A global financial system, if you can keep it.