This change in strategy will have far-reaching consequences in the global arena as well as in the Asian geopolitical landscape, with Vietnam being compelled to take its own stand.
Change in strategy
The ongoing Russia-Ukraine conflict with seemingly no end in sight, along with extreme sanctions imposed on Russia by Western nations and the US, will have far reaching consequences that will in all probability cause huge economic disruptions across the globe, mainly on four levels, namely, directly, reactively, pervasively, and systemically.
Besides the tremendous amount of innocent human casualties, the direct impact will weigh heavy on the GDP of both Russia and Ukraine, estimated to drop by 15% to 20% by end of 2022. Russian assets have been frozen globally at virtually every level and with Russia barred from the international SWIFT payment system, the situation will likely worsen further for Russia. An unstable rubble will lead to national default, serious shortage of goods, higher inflation, regional debt in businesses, and household expenses rising prohibitively day by day. It will also be very difficult for Russia to re-establish its economic, financial, and institutional links with the outside world in coming time, especially with the Western nations and the US. This hostility with other developed countries will further hinder efforts towards a long-term economic recovery.
The ripple effects of the Russia-Ukraine war have left the worst impact on most of the Western developed countries. These countries are now starting to feel the effects of higher inflation and increase in essential commodity prices, especially energy and wheat. Growth is also facing a decline with the continued disruption of global supply chains. What is most ominous is the spillover effect when it comes to economic and financial polarization in many parts of the world. Some commodity producers are able to earn enough income from higher export prices to offset the damage caused by lower global growth. On the other hand, a large number of countries, especially developing economies, are facing unfavorable terms in dealings in international trade, a decline in global demand, while the US dollar has strengthened and has added more instability in the currency and financial markets.
This systemic effect will cause the end of globalization. For the time being, the Western countries are still asserting their dominance over the international monetary and trade system that was painstakingly established after the second world war. However, now they will face a serious long-term challenge from China-led aggressive moves to build an alternative economic and financial system that may not happen immediately but is certain to emerge in the near future.
Given what is going on, even if the conflict ends, it is safe to say that a world will then be filled with countries capable of promoting security interests by means of comparative advantage. The initial clue to this lies in the fact that President Putin wants the Western countries to pay for gas supplies from Russia in rubbles. In other words, this is a political issue, not a commercial one. President Putin has described the move as a step to consolidate national sovereignty. The comparative advantage that has been used by President Putin as a means of solving political problems, is likely to become overt in a deglobalized world.
Global monetary system
There are concerns that by using financial weapons as punishment, the Western countries risk encouraging rivals to reject the US dollar and look for an alternative, as well as create a new system that could lead to a more fragmented global economy. Although the US has repeatedly rejected this idea, Mr. Wally Adeyemo, the US Deputy Treasury Secretary, has emphasized that the multilateral nature of the sanctions package is of more than 30 countries, representing over 50% of the global economy, from manufacturers with the world's leading breakthrough technology.
This not only shows how indispensable and costly this global financial system is to get rid of, but also show the futility of trying to avoid it. Russia's efforts to insulate sanctions have failed because of the strength of the financial system that the US and its allies have co-designed. On the question of whether the role of the US dollar as the world's reserve currency will decline, Mr. Wally Adeyemo said that the US has the deepest and most liquid capital market, a dynamic economy, and the most stable of laws, so the US dollar will be everywhere, even in countries trying to get out of it.
Data received until the end of March 2022 shows that the share of US dollars in the global reserves have decreased from 71% in 1999 to 59% in 2021. The loss of the US dollar has largely shifted to non-traditional reserve currencies. Of these, the Chinese yuan accounts for only a modest 25%; Australian and Canadian dollars account for 43%; while Danish, Norwegian, South Korean, and Swedish currencies account for 23%. Data shows that even if US dollar dominance looks dented, the Chinese yuan is still no alternative.
Countries that hold the US dollar and other major Western currencies may fear future sanctions, but if they hold the Chinese yuan, countries are aware of what the Chinese government can do as retaliation if they upset the Chinese government. For a currency to be internationalized, it requires a fully open financial market, and the cost would significantly weaken the government's control over China's financial, economic, and social system. In the capital markets, Beijing's recent over-intervention in the market, especially in technology companies, has been so severe that trillions of dollars have been knocked out of their biggest companies. China's internet which was once a huge engine of growth, is now taboo for many new investors due to geopolitical interference, and strict zero covid policy, causing many large investors to withdraw capital from mainland China.
Options for Vietnam
Prof. Barry Eichengreen of the University of California said that it is possible that China is now carefully calculating all the risks on all aspects of international trade and finance for its countermeasure moves. It is now important that everyone is constantly observing the matter carefully, which is also a useful suggestion for Vietnam.
In the immediate future, China and Russia are separating from the global Internet network and re-localizing their own networks. The global Internet will fragment into two halves. It is not only a step backward in human inter-cooperation, but also a huge political setback, with virtual walls rising up alongside the real ones that were reinforced in recent years.
The situation post the Russia-Ukraine conflict has the potential to shape a geo-currency landscape with Central Bank Digital Currency (CBDC) payment systems in place and possibly with various crypto-currencies in cyber-space. The CBDC will in the name of national sovereignty no longer differentiate by territory but by function in a pyramid-like hierarchical arrangement. Some of the top currencies are widely used within each block, while the bottom ones that were already alienated in the host country are now likely to serve only trivial administrative purposes.
Other countries will find it increasingly difficult to protect their national interests by maintaining contact with both the US and China. Instead, China and the United States will push countries to choose sides, force them to re-adjust their supply chains and conform to a given ecosystem of technologies and standards.
A good and effective lesson can be learnt from Hong Kong as an example from the uncertainties surrounding the future. The banks in Hong Kong were the region's early growth drivers, having agreed to embrace digitization long before Fintech came into the limelight. In the face of daily uncertainties, Hong Kong has determined that the only thing certain and constant throughout its ups and downs is digitalization.
Vietnam is also well on the path to adopting a digital economy, Fintech, and Central Bank Digital Currency (CBDC) but it needs to be autonomous and must run much faster to catch up and adapt to many unexpected developments in the geo-economic, geo-political, geo-virtual space in the current scenario.
