Deglobalisation and Russia’s war on Ukraine

Globalisation has started to level off since its heyday prior to the global financial crisis. But while the Russia-Ukraine war is likely to result in a reorienting of the Russian economy away from the West, we are wary of predicting broader deglobalisation trends emerging from the conflict. In particular, suggestions of the dollar losing its reserve currency status or a large “Eurasian” world trade axis arising, look to be exaggerated.

It is not accurate to talk about significant deglobalisation yet. Rather, we have seen a levelling off of the share of world trade in GDP and in some measures of financial globalisation. This doesn’t look much like the genuine deglobalisation periods of the past such as the interwar years.

Russia clearly faces a major reorientation of its trade and financial links. However, that will have little direct impact on broader globalisation trends, given the small size of its economy.

Nor is a potential “Eurasian” trade bloc likely to splinter world trade. Mutual trade between China, Russia, and India amounted to just US$200bn in 2020, less than the total imports of countries like Thailand or Turkey. Even if that were to double or triple, it would remain a sliver of world trade. Moreover, China’s trade remains heavily oriented towards the US and its allies.

The dollar’s dominance as a global currency is unlikely to be threatened. Economies considering switching away from the dollar lack a credible alternative, with the dollar’s position cemented by the depth of US financial markets and the greenback’s dominance in global trade invoicing. The use of China’s renminbi as a global currency is low and has stagnated on some measures.

The possible redenomination of some oil trade flows into alternative currencies also poses little risk to the dollar. The oil trade represents only 10% of dollar-denominated trade flow globally, and the redenomination of a fraction of that such as a portion of Saudi crude exports to China would not put a serious dent in global dollar demand, should it occur.

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