## Shifting Geopolitical Tectonic Plates

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### Immediate economic impacts of the war in Ukraine
- Projections for 2022:
  - Ukraine’s economy will shrink by 35 percent.
  - Russia’s economy will shrink by 8.5 percent.
- Human and migration effects:
  - Close to 6 million people fleeing Ukraine in less than three months.
- Commodities and inflation:
  - Russia and Ukraine are major producers and exporters of oil, gas, metals, and grains; prices of these commodities have soared, contributing to a significant increase in inflation.
- Trade and supply chains:
  - Trade flows heavily disrupted, with major impact on Russia’s and Ukraine’s close trading partners (Caucasus, central Asia, eastern Europe, and the Baltics) and broader supply chain disruptions.
- Financial conditions:
  - Financial conditions have tightened due to weakening economies and a faster-than-expected tightening of monetary policy in advanced economies.

### Structural risks to the global economic order
- Geopolitical fragmentation risk:
  - The war highlights a sudden shift in underlying “geopolitical tectonic plates,” risking fragmentation of the global economy into distinct economic blocs with different ideologies, political systems, technology standards, cross border payment and trade systems, and reserve currencies.
- Role of emerging markets:
  - Rising power of emerging market economies, especially China, reflects their integration into the world economy over the past 40 years; their economic rise has not been matched by a similar rise in financial and global institutional firepower.
- Dominance and fragility of the US dollar:
  - The dominance of the US dollar is described as absolute, organic, but ultimately fragile.
  - Dominance is absolute because no other international currency comes close in role as means of payment, unit of account, and store of value.
  - Dominance is organic because it arises from interlocking and self-reinforcing network effects and the liquidity and safety of US Treasuries.
  - Fragility arises because the US share of global output is bound to decline as emerging market economies rise, limiting the United States’ ability to remain the sole supplier of safe assets.
  - This dynamic is termed the “new Triffin Dilemma.”

### Novel developments and their implications
- Freezing of central bank reserves:
  - The unprecedented coordinated freezing of the international reserves of the Central Bank of Russia is a major new development that sets powerful centrifugal forces in motion.
  - Prior to sanctions, Russia held international reserves equal to 37 percent of Russian GDP intended to insulate it against financial sanctions.
  - With much of the reserves frozen, Russia is highly dependent on continued energy exports to fund its war effort.
- Geopolitical Triffin dilemma:
  - Sanctions on central banks raise questions about the usefulness of dollar international reserves if restrictions on their use appear arbitrary from the perspective of reserve-holding countries.
  - Expectations of future restrictions on the use of reserves could trigger moves away from dollar assets.

### Scenarios for the international monetary system
- Fragmentation scenario:
  - A world divided into separate blocs would solve the Triffin dilemma by making the world smaller, but it would be less efficient.
- Multipolar integrated scenario:
  - The world economy could remain integrated with interactions and possible coordination between multiple reserve currencies (including the US dollar), but such arrangements remain undefined.
- Uncertainty:
  - No reasonable prediction can be made about when or how the dollar’s absolute dominance might be supplanted by a multipolar system; the transition’s implementation could have major effects on the global economy and multilateralism.

### Policy implications and recommendations for the IMF
- The IMF’s role:
  - A more fragmented world is more volatile and vulnerable, with more restricted access to safe assets and a less comprehensive global financial safety net.
  - Such a world needs the IMF more, not less.
- Institutional response:
  - The IMF must find ways to deliver financial assistance and expertise and to maintain and represent all members, even if the political environment becomes more challenging.
  - If geopolitical tectonic plates start drifting apart, more bridges—not fewer—will be needed.

*PIERRE-OLIVIER GOURINCHAS is the IMF’s economic counsellor and director of the Research Department.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/june/straight-talk.pdf_