There has been a lot of discussion in the news lately about the rise of the Hong Kong dollar and its relationship to sanctions in Russia. Here I will try to make sense of some of this news in layman terms for those on the net that this reaches.
Thirty one years ago in the face of economic challenges, Hong Kong pegged its currency to the US dollar. Basically this means that when the American dollar rises or falls, so does their currency and when the Hong Kong dollar rises in value, they buy American money to bring their currency back down to a similar level. Why would they do that? Well, having their currency pegged to a larger economy has its benefits, the main benefit being a limited probability of inflation or devaluation of their home currency.
So, what does this have to do with sanctions in Russia? Well, since America’s dollar is the currency of international trade, multi-national companies the world over tend to buy up American dollars and trade in them when it is convenient across borders, which is nearly always. However, with America being the driving force behind sanctions in Russia, many of the large companies there are selling their greenbacks and buying up Hong Kong dollars instead. Since the HK dollar is pegged to the American one, this means that big companies can continue to buy and sell on the global market at pretty much the same cost as before while avoiding the impact of potential sanctions from America. MegaFon and Norilsk Nickel, a large telecom company and the world’s largest nickel and palladium producer, are two of the most publically recognized to have done so.
While this does not mean the American dollar is being lost as the global currency (though some seem to think so), it does mean that in a globally integrated society like the one we live in now and the one that we continue to strive for, the effectiveness of sanctions as a political pressure tool is beginning to wane. By skirting American economic pressure, Russian companies can continue pretty much as business as usual while us Americans can go blue in the face talking about sanctions.