Unprecedented financial sanctions imposed on Russia after Russia’s invasion of Ukraine threatens to gradually erode the dollar’s dominance and lead to a more fragmented international monetary system, a senior International Monetary Fund official has warned.

Gita Gopinath, First Deputy Managing Director of the International Monetary Fund, said: Comprehensive measures Policies imposed by Western countries after the Russian invasion, including restrictions on their central banks, may encourage the emergence of small currency blocs based on trade between different groups of countries.

“Even in this scenario, the dollar will remain the dominant global currency, but a split on a smaller level is certainly quite possible,” she told the Financial Times. “We’ve seen that. , some countries are renegotiating the currencies in which they get paid for trade.”

Russia has sought to reduce its reliance on the dollar for years, a movement that accelerated rapidly after the United States imposed sanctions in 2014 in retaliation for its annexation of Crimea.

Despite these efforts, prior to the invasion, Russia still had about one-fifth of its foreign exchange reserves in dollar-denominated assets, with a sizable portion held overseas in Germany, France, the U.K. and Japan. These countries are now united to insulate Moscow from the global financial system.

Greater use of other currencies in global trade will lead to further diversification of reserve assets held by central banks, Gopinath said.

“Countries tend to accumulate reserves in currencies that they trade with and borrow from the rest of the world, so you might see some slowing trends, with other currencies playing a bigger role [in reserve assets],” she says.

Backed by strong and highly credible institutions, deep markets, and the fact that it is freely convertible, the dollar’s dominance is unlikely to be challenged in the medium term, she added.

Gopinath noted that over the past two decades, the dollar’s share of international reserves has fallen from 70% to 60% as other currencies have emerged, led by the Australian dollar.

About a quarter of the decline in the dollar’s share can be attributed to greater use of the renminbi. But less than 3 percent of global central bank reserves are denominated in Beijing’s currency, according to the International Monetary Fund.

Before the current crisis, Beijing was internationalizing the yuan and was already ahead of other countries in adopting central bank digital currencies, Gopinath said. But she added that the yuan was unlikely to replace the dollar as the main reserve currency.

“This requires full convertibility of currencies, open capital markets and institutions that can support [them]. This is a slow process that will take time, and the dollar’s dominance will continue for some time,” she said.

The war will also spur the adoption of digital finance, from cryptocurrencies to stablecoins and Central Bank Digital Currencyshe added.

“All of this will receive greater attention in the wake of recent events, which leads us to international regulatory issues,” Gopinath said. “There’s a void there to fill.”