[The Viewpoint of Dongki Kim] Weaponization of the Dollar: Reality and Limitations

Used as a Weapon for U.S. Political Goals
Financial Sanctions via CHIPS and SWIFT
Sanctions on Russia Since 2014
Selling Oil and Gas to China and India
GDP Growth Continues Despite War

Dongki Kim, Author of "The Power of the Dollar" and "The Power of Geopolitics," Attorney

The status of the dollar in the international economy is dominant. The proportion of dollar assets among countries' foreign reserves is about 58%, and approximately 54% of global export payments are settled in dollars. The United States uses this dollar power as a weapon to achieve political objectives.

There are two key institutions that play a decisive role in U.S. sanctions. One is CHIPS, which processes fund transfers arising from inter-country transactions, interbank transactions, and securities transactions. It handles about 96% of international fund transfers. The direct participants in CHIPS are fewer than 50 large financial institutions, and other institutions wishing to use this payment system must obtain cooperation from these direct participants. The U.S. government can instruct these direct participants to prohibit transactions with sanctioned entities.

Another important institution is SWIFT. It provides a communication service that encrypts remittance information at a high level, used by over 11,000 financial institutions in more than 200 countries. The U.S. prevents sanctioned entities from using this service. As long as the U.S. can control these two private institutions, it can use the dollar as a weapon. The agency responsible for the practical execution of sanctions is the Office of Foreign Assets Control (OFAC) under the U.S. Department of the Treasury.

The U.S. government has imposed various sanctions to pressure Iran, North Korea, Cuba, and several terrorist organizations. However, the country that has faced the most sanctions is Russia. Western sanctions, which began in earnest after Russia annexed the Crimean Peninsula in 2014, significantly increased after Russia's invasion of Ukraine in 2022. This year, the number of sanctions exceeded 21,000. One such sanction is the freezing of about $280 billion of assets of the Russian Central Bank.

Countries' responses to sanctions or the risk of sanctions vary. First, they sell dollar assets such as U.S. Treasury bonds and increase the proportion of other assets. A representative example is gold. China's gold holdings increased from 800 tons in 2008 to about 2,000 tons in 2020. Central banks of about 50 countries, mostly unfriendly to the West, have significantly increased their gold holdings since 2010.

Another method to avoid sanction risks is currency swaps. Turkey, before and after facing U.S. sanctions in 2018, signed currency swap agreements with Qatar, Iran, and others to reduce dollar settlements. In 2020, there were about 50 currency swap agreements worldwide aimed at avoiding sanctions. Currency swaps between China and Russia have also increased significantly.

Additionally, Russia began operating SPFS in 2014 to replace SWIFT, but international participation remains limited. China launched CIPS in 2015, integrating the functions of CHIPS and SWIFT. In September this year, daily transactions exceeded 30,000, and the transaction amount approached 800 billion yuan per day, showing significant growth. However, compared to CHIPS, which settles $1.8 trillion daily, and SWIFT, which processes about 50 million transactions daily, it is still far behind.

There are limits to sanctions using the dollar. Despite numerous sanctions, Russia has neither abandoned the war nor seen its economy collapse. Russia's GDP is forecasted to grow by 2.6% this year. China, India, and others have helped Russia by purchasing large quantities of crude oil and gas without using dollars. Moreover, excessive use of sanctions increases other countries' desire to avoid using the dollar, ultimately harming the dollar's status. Last year, Treasury Secretary Janet Yellen also expressed such concerns. The weaponization of the dollar and responses to it will be important scenes in future international relations.

Kim Dong-gi, author of ‘The Power of the Dollar’ and ‘The Power of Geopolitics,’ lawyer