Shifting Geopolitical Tectonic Plates

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The Russian invasion of Ukraine has opened a new chapter in international relations with important implications for the global economic order.
Within three days of the invasion, the Group of Seven, consisting of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, soon followed by other countries, deployed a range of economic sanctions against the aggressor.
The war and associated sanctions will slow down activity and increase price pressures (as discussed in the latest World Economic Outlook).

Ukraine’s economy is projected to shrink by 35 percent in 2022.
Russia’s economy is projected to shrink by 8.5 percent in 2022.
The war has created a major refugee crisis in Europe, with close to 6 million people fleeing Ukraine in less than three months.
Commodity prices have soared because Russia and Ukraine are major producers and exporters of oil, gas, metals, and grains, contributing to global inflationary pressures.
Trade flows and supply chains have been heavily disrupted, affecting Russia’s and Ukraine’s close trading partners (Caucasus, central Asia, eastern Europe, the Baltics) and more broadly.
Financial conditions tightened through the weakening of many economies and indirectly via a faster-than-expected tightening of monetary policy in advanced economies.

The war reveals a sudden shift in underlying “geopolitical tectonic plates” that risks fragmenting the global economy into distinct economic blocs with different ideologies, political systems, technology standards, cross border payment and trade systems, and reserve currencies.
The economic rise of China and other emerging market economies has not been matched by a similar rise in their financial and global institutional firepower.
The dominance of the US dollar is described as:
- absolute (no other international currency comes close as a means of payment, unit of account, and store of value),
- organic (arising from interlocking and self-reinforcing network effects and the liquidity and safety of US Treasuries),
- ultimately fragile (because the US share of global output is bound to decline as emerging markets rise).
The author and Hélène Rey have termed the resulting tension the “new Triffin Dilemma.”
Possible future architectures:
- Separate blocs that solve the Triffin dilemma by making the world smaller but less efficient.
- An integrated world with interactions and coordination among multiple reserve currencies remaining undefined.

The coordinated freezing of the international reserves of the Central Bank of Russia is a major new development with powerful centrifugal effects that could accelerate economic fragmentation.
Russia had held a large war chest of international reserves—37 percent of Russian GDP—intended to insulate it against financial sanctions; freezing those reserves undermined that buffer and increased Russia’s dependence on continued energy exports to fund its war effort.
Sanctions on central banks raise questions about the usefulness of dollar international reserves if conditions for restrictions appear arbitrary from the perspective of reserve-holding countries.
This dynamic is characterized as a “geopolitical Triffin dilemma”: the expectation of future restrictions on the use of reserves could trigger moves away from dollar assets.

A fragmented world is more volatile and vulnerable, with restricted access to safe assets and a less comprehensive global financial safety net.
A fragmented world will need the IMF more, not less.
Recommended institutional posture:
- The IMF should resist scaling ambitions down to focus only on the bloc historically aligned with the original signatories of the Bretton Woods Agreement.
- 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, the institution should build more bridges, not fewer.

Podcast: IMF Chief Economist, Pierre-Olivier Gourinchas, discusses what fragmentation of the global economy might mean for the dominance of the US dollar in the international monetary and financial system.

Pierre-Olivier Gourinchas, F&D Magazine, June 2022.

Shifting Geopolitical Tectonic Plates
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