Dollar Warfare

The Sanctions Paradox and the Uneven Search for Alternatives to the Greenback

In February 2022, Western governments placed an estimated $300 billion in Russian central-bank assets held abroad beyond Moscow’s reach in a matter of days. The decision exposed a practical vulnerability for countries maintaining assets abroad: reserves accumulated to protect an economy can become inaccessible when the governments controlling their custody impose sanctions.

Four years later, the dollar remains central to international finance. Yet governments seeking to reduce their exposure to foreign financial restrictions are exploring alternative reserve assets and payment channels. These mechanisms address different financial vulnerabilities. Their ability to reduce dependence on established international networks remains uncertain, particularly during periods of financial restriction.

I. The Architecture of Primacy: Liquidity, Intermediation, and Invoicing

Consider a hypothetical petrochemical-resin sale from a South Korean exporter to a Brazilian buyer. If neither firm maintains substantial working balances in the other’s currency, invoicing and settling the contract in dollars can simplify the transaction. In this example, the Brazilian importer’s bank purchases dollars in the foreign-exchange market and transfers them through international correspondent banking accounts to the Korean exporter’s bank in Seoul, which credits the exporter’s account in dollars or converts the proceeds into won according to the firm’s instructions. For these firms, dollar settlement may provide access to deeper currency markets and narrower spreads than direct conversion between won and reais, although the overall cost depends on their banks and the available trading routes.

The depth of the U.S. Treasury market reinforces that liquidity. Treasury securities provide a large pool of dollar-denominated assets for investors and reserve managers and serve as collateral across international funding markets. Their scale makes the market difficult for alternative reserve assets to replicate.

These advantages reinforce one another. Dollar invoicing sustains demand for dollar funding, deep currency markets make settlement attractive to businesses, and the Treasury market gives reserve managers a liquid destination for dollar holdings. The result is a network in which commercial practices and official reserve choices help sustain each other, making diversification more difficult than establishing a new payment channel.

The IMF’s revised Currency Composition of Official Foreign Exchange Reserves (COFER) series documents the dollar’s long-term persistence despite gradual diversification. The dollar accounted for 57.13 percent of global foreign-exchange reserves in the first quarter of 2026. The revised historical series extends back to 2000 and incorporates estimates for reserves whose currency composition was previously unallocated.

The path has not been smooth. The first-quarter figure was up from 56.42 percent in the fourth quarter of 2025, with exchange-rate valuation effects accounting for approximately half the increase. A quarterly change in the reported share can therefore owe as much to valuation as to portfolio decisions.

Evaluating currency dominance requires examining both asset accumulation and foreign-exchange market activity. Reserve holdings reflect long-term portfolio choices by central banks, while foreign-exchange turnover measures trading activity across commercial, investment and interdealer markets.

Currency	IMF COFER Share of Global FX Reserves (Q1 2026)	BIS Preliminary FX Turnover Share (April 2025)
U.S. Dollar (USD)	57.13%	89.2%
Euro (EUR)	20.03%	28.9%
Japanese Yen (JPY)	5.44%	16.8%
Pound Sterling (GBP)	4.40%	10.2%
Chinese Renminbi (RMB)	1.99%	8.5%
Remaining Currencies	11.01%	46.4%

Sources: IMF COFER Dataset (Q1 2026, revised series); Bank for International Settlements Triennial Central Bank Survey (April 2025 survey, preliminary currency shares released September 30, 2025). Notes: The IMF’s revised series estimates the currency composition of previously unallocated reserves. Remaining currencies are those not individually displayed; the 46.4% BIS figure aggregates all currencies outside the five shown. FX turnover shares total 200 percent because every transaction involves two currencies. The table compares currency shares of official reserves with currency involvement in foreign-exchange trading. These are different measures and are not directly comparable.

Even in regions with extensive internal trade, dollar-based financial intermediation remains dominant. In a September 2026 IMF article, AMRO chief economist Dong He reported in Asia’s Pragmatic Currency Pivot that within the ASEAN+3 economies the dollar accounts for more than 80 percent of trade invoicing and nearly 85 percent of foreign-exchange settlement. Asian economies are diversifying, and He argues that regional production networks give local currencies a growing rationale. The figures illustrate the scale of established dollar use that alternative payment arrangements must contend with, even when those arrangements do not directly change the currency in which trade is invoiced.

The dollar’s advantages help explain why efforts to diversify international payments have not translated into its displacement from global finance. But liquidity offers little protection when a reserve holder loses access to assets held abroad.

II. When Reserves Became Vulnerable: The Sovereign Asset Precedent

The Russian reserve freeze showed how control over custody could supersede an asset owner’s ability to use its holdings. Following Russia’s invasion of Ukraine in February 2022, the G7, the European Union, and partner governments immobilized an estimated $300 billion in Russian central-bank assets held abroad, representing roughly half of Russia’s pre-invasion gross holdings. European Commission documentation estimated that approximately €210 billion of Central Bank of Russia assets were immobilized across the European Union. A substantial portion was held at Euroclear in Belgium. According to Euroclear’s first-half 2026 financial results, €202 billion of Euroclear Bank’s €241 billion balance sheet at June 30, 2026 related to sanctioned Russian assets.

The legal structure of the measure separated legal title from transactional access. Russia retained legal ownership of the assets. Under European Union Council Decision (CFSP) 2022/335 and Council Regulation (EU) 2022/334 adopted on February 28, 2022, transactions related to the management of the reserves and assets of the Central Bank of Russia were prohibited. As immobilized securities matured and generated payments, cash balances accumulated at Euroclear Bank because the proceeds could not be transferred to Russia. Moscow was deprived of the operational ability to liquidate, transfer, or deploy either category.

This distinction between the immobilized principal and extraordinary net profits governed subsequent EU and G7 mechanisms to fund Ukraine. Under Council Regulation (EU) 2024/1469, adopted in May 2024, the European Union established rules directing extraordinary net profits generated by immobilized Russian sovereign assets toward Ukrainian support. The reinvestment of blocked cash balances generated income. Under EU rules, extraordinary net profits are calculated after relevant expenses associated with managing the immobilized assets, related risk-management costs and applicable corporate taxes. Regulation 2024/1469 also established a financial contribution to the EU of 99.7 percent of the qualifying net profits, subject to provisions allowing depositories to retain amounts for risk management. The European Union held that the extraordinary net profits accrued to the depositories, which allowed those revenues to be directed toward Ukraine while the immobilized principal stayed in place.

At the June 2024 Apulia Summit, G7 leaders agreed to establish the Extraordinary Revenue Acceleration (ERA) loans framework to deliver approximately $50 billion in financial support to Ukraine, serviced by these future revenue streams, as outlined in the Apulia Summit Communiqué. The European Union formalized its participation and created the Ukraine Loan Cooperation Mechanism under Regulation (EU) 2024/2773, adopted on October 24, 2024.

On December 12, 2025, the Council adopted Council Regulation (EU) 2025/2600 under Article 122 TFEU, establishing a separate temporary prohibition on transfers of immobilized Central Bank of Russia assets, subject to periodic review and maintained while releasing significant resources to Russia would pose or threaten serious economic difficulties for the EU and its member states. The prohibition is temporary and is linked to Russia ending its war against Ukraine, providing reparations sufficient for reconstruction without adverse economic or financial consequences for the EU, and its actions objectively ceasing to pose a serious risk of severe economic difficulties to the EU and its member states. Separately, on December 18, 2025, the European Council agreed to provide Ukraine with a €90 billion loan for 2026 and 2027, financed through EU capital-market borrowing and backed by the EU budget, as documented in the European Council conclusions. The Ukraine Support Loan was subsequently established through enhanced cooperation under Regulation (EU) 2026/467, providing for up to €90 billion in assistance for 2026 and 2027.

The distinction matters because reserves serve two purposes: preserving national wealth and providing usable liquidity during financial stress. Russia could not deploy the immobilized principal. For other reserve holders, the episode exposed a risk that conventional measures of asset safety, liquidity, and creditworthiness do not fully capture: access also depends on the jurisdiction governing custody.

State and central-bank assets generally benefit from protections against attachment and execution in foreign courts, subject to applicable international and domestic law. Those protections raise legal questions distinct from regulatory restrictions on transactions involving assets held by financial institutions. Statutory economic emergency powers operate through regulatory prohibitions directed at domestic financial intermediaries rather than court-ordered property seizures. The episode demonstrated how regulatory restrictions can suspend access to foreign-held official reserves without a judicial seizure, while leaving separate international legal questions regarding asset confiscation and revenue reallocation contested.

Secondary sanctions extend financial pressure beyond those custodial relationships by exposing foreign banks to restrictions on their access to the U.S. financial system.

III. The Cost of Staying Connected: Secondary Sanctions and Compliance Chills

For a bank handling international trade, the risk of processing a sanctioned transaction can extend well beyond the payment itself. Restrictions on its U.S. correspondent accounts could affect a much larger part of its business. That exposure helps explain why American sanctions can influence transactions between companies and banks outside the United States.

U.S. primary sanctions generally restrict transactions within U.S. jurisdiction, including dealings by U.S. persons with blocked individuals or entities, subject to applicable authorizations and exemptions. Many cross-border U.S. dollar payments pass through a U.S. correspondent bank to achieve final settlement via domestic interbank payment networks such as Fedwire or the Clearing House Interbank Payments System (CHIPS). Where a payment involves a U.S. bank or another relevant U.S. nexus, the transaction may fall within applicable OFAC prohibitions, subject to the particular sanctions program and any authorizations or exemptions.

Secondary sanctions can expose foreign financial institutions to U.S. restrictions for specified conduct even where the underlying transaction has no direct U.S. nexus and no dollar clearing.

In December 2023, the White House issued Executive Order 14114, which amended Executive Order 14024 to authorize the Treasury Department to impose secondary sanctions on foreign banks facilitating significant transactions involving Russia’s military-industrial base. In June 2024, the Treasury expanded this authority by broadening the definition of the military-industrial base to include all persons blocked under Executive Order 14024. The expanded authority covers foreign financial institutions that conduct or facilitate significant transactions, or provide any service, involving Russia’s military-industrial base, subject to the order’s applicable criteria. OFAC guidance and FAQs 1147 and 1181 explain the expanded secondary-sanctions authority. The Treasury may restrict a covered foreign financial institution’s U.S. correspondent or payable-through accounts or block its property subject to U.S. jurisdiction when the applicable criteria are met. FAQ 1182 addresses the treatment of otherwise authorized or exempt transactions.

For commercial banks operating in major trading hubs, the risk of losing dollar clearing may outweigh the returns from specific trade corridors. The practical impact was documented in early 2024, when Reuters reported that banks in China, Turkey, and the United Arab Emirates had tightened scrutiny of payments involving Russian oil companies following Executive Order 14114. According to banking and trading sources cited in the report, some transfers were delayed for weeks or months, while others were rejected. Banks sought written assurances that designated entities were not involved in the transactions. The reported disruptions illustrated how the threat of secondary sanctions could affect trade payments even when banks had not established that a particular transaction was prohibited.

While risk-averse institutions often engage in precautionary restrictions, compliance controls face a different challenge from deliberate evasion schemes. On September 21, 2026, the Financial Times published an investigation titled “Kremlin-backed forgery scheme moved $6.9bn through global banks”. The investigation detailed an alleged illicit financial network known as A7, associated with Moldovan businessman Ilan Shor and Russia’s Promsvyazbank. According to the report, the network routed more than $6.9 billion through international commercial banks using front companies, fabricated trade invoices and transit accounts across several jurisdictions.

The report identified major global institutions, including Standard Chartered and Citigroup, as having processed payments linked to these accounts. According to the Financial Times, A7 used falsified commercial documentation to respond to banks’ compliance inquiries. The reported transactions do not, by themselves, establish that the institutions processing them knowingly facilitated the alleged scheme.

The two cases illustrate contrasting pressures on financial compliance. Banks may delay legitimate transactions to manage sanctions exposure, while networks attempting to evade restrictions may use fabricated documentation to conceal payment flows. Neither case, on its own, establishes how widespread either practice is.

IV. Building the Counter-Architecture: Gold, Rails, and Bilateral Settlement

The search for alternatives has produced several approaches to financial autonomy, but they address different vulnerabilities. Gold changes where reserve value is held. CIPS provides a dedicated clearing mechanism for renminbi transactions. mBridge tests a different settlement architecture, while bilateral accounts permit trade without relying exclusively on established international currencies. Their usefulness depends on which financial exposure a government is trying to reduce.

1. Gold: Protecting Reserve Holdings

Gold held in a central bank’s domestic vaults reduces dependence on foreign custodians and avoids the credit exposure associated with claims on foreign issuers. Its usefulness during a financial crisis still depends on market liquidity, valuation, and the practical ability to transact.

According to the World Gold Council, estimated net central-bank gold demand totaled 1,092 tonnes in 2024 and 863 tonnes in 2025. In the first half of 2026, estimated net demand reached approximately 345 tonnes, including 289 tonnes in the second quarter. Central banks identify multiple motives for gold accumulation, including long-term capital preservation, portfolio diversification, and hedging against inflation.

The National Bank of Poland provides an example of reserve diversification. Poland reported adding 102 tonnes of gold in 2025 and an estimated 82 tonnes during the first half of 2026. Its stated target is 700 tonnes, as confirmed in statements by Governor Adam Glapiński and noted in World Gold Council reports.

Gold also has costs. It yields no recurring interest income and requires physical custody, insurance, and transport. If gold is held in foreign custodial centers, such as the Bank of England or the Federal Reserve Bank of New York, it remains subject to the jurisdictional reach of those host institutions. The Bank of Russia’s 22-tonne sale in the second quarter shows that individual holdings move in both directions. The WGC also describes first-half central bank net demand as the lowest for a first half since 2022.

2. Alternative Payment Networks: CIPS and Clearing Infrastructure

Established in 2015 under the supervision of the People’s Bank of China, the Cross-Border Interbank Payment System (CIPS) provides clearing and settlement services for international transactions in renminbi. According to CIPS statistics reproduced in Table 7.1 of the Boao Forum for Asia’s 2026 annual report, the system processed approximately 6.61 million transactions worth ¥123.06 trillion in 2023, rising to 8.22 million transactions worth ¥175.49 trillion in 2024.

Many participating institutions nevertheless continue to use SWIFT to transmit payment instructions into the CIPS clearing system. A dedicated clearing system therefore does not necessarily eliminate reliance on established international messaging infrastructure.

SWIFT’s Global Currency Tracker, August 2026, published on August 19, put the renminbi at 3.10 percent of customer-initiated and institutional payment values in July 2026, compared with 50.99 percent for the U.S. dollar. The tracker measures currency use within SWIFT’s messaging network, not all cross-border payments worldwide, so its payment shares cannot be directly compared with CIPS clearing turnover. China’s capital controls and limitations on capital-account convertibility present further constraints on wider international renminbi use.

3. Project mBridge: Testing Settlement Technology

Project mBridge tested another approach: settling cross-border payments through central-bank digital currencies. Initiated by the BIS Innovation Hub in collaboration with the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China, and the Central Bank of the United Arab Emirates, the platform explored multi-currency cross-border settlement using distributed ledger technology.

The platform tested payment versus payment (PvP) settlement for foreign-exchange transactions. In traditional correspondent banking, cross-border payments traverse chains of intermediary banks, which can introduce additional fees, delays and settlement risk. The platform’s design allows participating banks to settle tokenized central-bank liabilities on a shared ledger, potentially reducing reliance on intermediary correspondent chains.

The platform reached its minimum viable product (MVP) stage in mid-2024, as announced in a Bank for International Settlements media release, and the BIS concluded its operational steering role in October 2024, handing management to the participating central banks, as detailed in the BIS Project mBridge record. Saudi Arabia joined mBridge as a full participant in June 2024. According to the Financial Times, the Saudi Central Bank completed its planned proof of concept on May 13, 2025, and subsequently ceased participating in mBridge, as reported in Saudi Arabia quits China-led cross-border currency platform.

According to Atlantic Council analysis published in January 2026, mBridge had processed more than 4,000 cross-border transactions worth approximately $55.49 billion by November 2025. Macao began live operations on the platform on June 2, 2026, according to an official announcement the following day. These cumulative figures do not distinguish pilot activity from sustained commercial use or establish whether the platform reduces operating costs, achieves broad private-sector adoption or remains resilient under financial restrictions.

4. Bilateral Accounts: Exposing Trade Imbalances

Bilateral settlement mechanisms have expanded as another practical alternative, but they expose the difficulties of settling trade between partners with sharply unequal export volumes. Following Western sanctions in 2022, India’s imports of discounted Russian crude oil expanded rapidly, widening its bilateral merchandise-trade deficit with Russia.

In May 2023, Russian Foreign Minister Sergey Lavrov publicly acknowledged difficulties using accumulated rupee balances, telling reporters at the Shanghai Cooperation Organisation meeting in Goa that converting them into another currency was under discussion, as documented in the Ministry of Foreign Affairs transcript.

Reuters reported a day earlier, citing Indian officials, that the two countries had suspended talks on a rupee-settlement mechanism, and that more trade was being paid in currencies such as the UAE dirham. Both governments later disputed that account. In August 2024, Reuters reported, citing an Indian government source, that the Indian and Russian central banks had renewed discussions on a mechanism for expanding local-currency trade, including a reference exchange rate between the rupee and ruble.

The Reserve Bank of India established its Special Rupee Vostro Account framework in July 2022 under A.P. (DIR Series) Circular No. 10 (RBI/2022-2023/90), permitting international trade to be invoiced and settled in rupees. Surplus balances could be used for specified transactions and invested in permitted Indian assets, including government securities and treasury bills, subject to applicable regulations. These options offered ways to deploy surplus rupees, but their commercial usefulness depended on the availability of suitable imports, investments and conversion channels. Persistent trade imbalances could therefore remain an obstacle even where the settlement mechanism itself functioned.

Together, these alternatives reduce particular points of financial dependence without replacing the full range of services supplied by established international markets. Their value will depend not only on whether transactions can be completed, but also on whether participants can obtain financing, convert their proceeds and maintain settlement when access to existing networks is restricted.

V. The Sanctions Paradox and the Fragmented Order

The emerging alternatives can be assessed across three dimensions: reserve holdings, payment infrastructure and international currency use.

Dimension of Financial Change	Observed Developments	Institutional and Empirical Constraints
Reserve Diversification	Estimated net central-bank gold demand exceeded 800 tonnes in both 2024 and 2025; currencies not individually listed in Section I collectively accounted for approximately 11 percent of global foreign-exchange reserves in Q1 2026.	Gold generates no recurring yield and incurs custody costs; sovereign debt markets outside the U.S. lack comparable scale and liquidity.
Payment Autonomy	CIPS annual turnover reached ¥175.49 trillion in 2024; mBridge reported more than $55 billion in cumulative transactions by November 2025; India and Russia explored expanded local-currency settlement.	Many CIPS transactions still use SWIFT messaging; cross-border CBDCs face regulatory hurdles; bilateral accounts face trade-imbalance bottlenecks.
International Currency Use	The renminbi accounted for 8.5% of global FX turnover in the BIS’s preliminary results for its April 2025 survey, while the dollar appeared on one side of 89.2% of transactions. Separately, SWIFT’s July 2026 data show the renminbi at 3.10% of customer-initiated and institutional payment values and the dollar at 50.99%.	Capital account controls, managed exchange rates, and limited secondary-market liquidity constrain broad private-sector adoption of the renminbi.

Note: These indicators cover different periods and measure distinct activities. Reserve shares, foreign-exchange turnover, payment-system turnover and cumulative settlement volumes should not be interpreted as directly comparable measures of currency adoption.

The evidence points to a more fragmented financial architecture without demonstrating a comparable decline in the dollar’s established international functions. Reserve diversification can reduce exposure to particular custodians, while alternative payment systems can give participating countries additional ways to settle trade. Neither development necessarily changes the dollar’s place in invoicing, financing, and international liquidity.

Practical payment autonomy would show up first in routine transaction volumes that include firms beyond state-sponsored arrangements. It would be confirmed only if settlement held during a period of disruption. A reduction in sanctions leverage would require a further test. Affected institutions would need to keep financing and settling economically significant transactions despite restrictions on their access to established networks.

Sources and Documentation

International Monetary Fund: Currency Composition of Official Foreign Exchange Reserves (COFER), Q1 2026 data release reflecting comprehensive revised historical series (Washington, D.C., July 2026).
Bank for International Settlements: Triennial Central Bank Survey of Foreign Exchange and Over-the-Counter Derivatives Markets, April 2025 survey; preliminary turnover commentary September 30, 2025 (reporting preliminary currency shares and a preliminary $9.6 trillion total), complete turnover data release December 2025 (revising average daily turnover to $9.5 trillion), and final statistical tables June 2026 (Basel).
Bank for International Settlements: Project mBridge reaches minimum viable product stage and invites further international participation, Media Release (Basel, June 5, 2024).
Bank for International Settlements: Project mBridge: Connecting economies through CBDC, Project documentation and operational handover notice (Basel, October 2024).
AMRO / IMF Regional Analysis: Dong He, Asia’s Pragmatic Currency Pivot, Finance & Development (September 2026).
World Gold Council: Gold Demand Trends: Q2 2026: Central Banks (London, July 30, 2026); Gold Demand Trends: Full Year 2025 (London, January 2026).
European Commission: EU sanctions against Russia: Questions and answers on the immobilisation of Central Bank of Russia assets (Brussels, 2024).
Council of the European Union: Council Regulation (EU) 2022/334 and Council Decision (CFSP) 2022/335 prohibiting transactions related to the management of reserves and assets of the Central Bank of Russia (February 28, 2022); Council Regulation (EU) 2024/1469 concerning extraordinary net profits from immobilized Russian central-bank assets (May 2024); Council Regulation (EU) 2025/2600 on emergency measures under Article 122 TFEU (December 12, 2025).
European Parliament and Council of the European Union: Regulation (EU) 2024/2773 establishing the Ukraine Loan Cooperation Mechanism and providing exceptional macro-financial assistance (October 24, 2024); Regulation (EU) 2026/467 implementing enhanced cooperation on the establishment of the Ukraine Support Loan for 2026 and 2027 (Brussels, 2026).
European Council: European Council conclusions on macro-financial assistance and loan support for Ukraine (Brussels, December 18, 2025).
Euroclear: Euroclear delivers sustained growth across core activities in H1 2026, First-Half 2026 Results (Brussels, July 17, 2026).
G7 Leaders: Apulia Summit Communiqué, Extraordinary Revenue Acceleration (ERA) Loans for Ukraine (Apulia, June 2024).
Executive Office of the President: Executive Order 14114: Taking Additional Steps With Respect to Specified Harmful Activities of the Government of the Russian Federation, 88 FR 89271 (December 22, 2023; amending Executive Order 14024).
U.S. Department of the Treasury: Sanctions Expansion on Russia’s Military-Industrial Base, broadening the definition under Executive Order 14024 to include all blocked persons (Washington, D.C., June 12, 2024).
U.S. Department of the Treasury, Office of Foreign Assets Control: Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Directed at Sanctions Evasion and Other Activities Involving the Russian Federation, Compliance Guidance (Washington, D.C., issued December 22, 2023; updated June 12, 2024).
U.S. Department of the Treasury, Office of Foreign Assets Control: OFAC FAQ 1147, OFAC FAQ 1181 and OFAC FAQ 1182 (Washington, D.C., 2024).
Reuters: “Exclusive: Russia struggles to collect oil payments as China, UAE, Turkey raise bank scrutiny” (March 27, 2024); “Exclusive: India, Russia suspend negotiations to settle trade in rupees -sources” (May 4, 2023); “India, Russia explore rupee-ruble reference rate for bilateral trade” (August 14, 2024).
Boao Forum for Asia: Asian Economic Outlook and Integration Progress Annual Report 2026, Table 7.1 “Operational Indicators of CIPS” (Boao, March 2026).
SWIFT: SWIFT Global Currency Tracker, August 2026 (La Hulpe, August 19, 2026).
Atlantic Council: What to watch as China prepares its digital yuan for prime time (Washington, D.C., January 2026).
Macao Special Administrative Region Government: Monetary Authority of Macao commences live operations on Project mBridge, Official News Release (Macao, June 3, 2026).
Ministry of Foreign Affairs of the Russian Federation: Foreign Minister Sergey Lavrov remarks and answers to media questions following the Shanghai Cooperation Organisation Council of Foreign Ministers meeting (Goa, May 5, 2023).
Reserve Bank of India: International Trade Settlement in Indian Rupees (INR), A.P. (DIR Series) Circular No. 10 (Mumbai, July 11, 2022).
Financial Times: Kremlin-backed forgery scheme moved $6.9bn through global banks (September 21, 2026); Saudi Arabia quits China-led cross-border currency platform (September 20, 2026).