A tougher Russia sanctions bill could test dollar trust

Friday’s revised Russia sanctions bill, now backed by the Trump administration, would sharpen pressure on Moscow. First in line are not senators but compliance officers, commodity traders and correspondent banks trying to decide which Russia-linked payments become unfinanceable once Washington widens tariff-backed secondary pressure.

For markets, the bill’s force sits less in Capitol Hill theatre than in its transmission channel. Under the compromise described by The Hill, the headline tariff threat would fall to 100 per cent from 500 per cent and be aimed at the biggest buyers of Russian oil and gas. China, India, Slovakia, Hungary and Azerbaijan become the pressure point. Compared with another blacklist aimed directly at Russia, that is a wider lever.

Analysts are reading a different risk. Reserve-currency status is not about to vanish. Instead, another aggressive use of the dollar system could push banks, central banks and trading partners to spend more time building routes around it.

In a Senate release, the bill’s backers said the goal was to:

“hold major purchasers of Russian oil and gas accountable for supporting Russia’s war in Ukraine”
Source: Senate release on the Russia sanctions bill

Cargo-risk desks will focus on that wording. Rather than a dramatic reserve selloff, the immediate danger is that banks financing commodity cargoes, insurers covering voyages and importers settling invoices begin adding compliance friction to ordinary trade.

Where the pressure lands

Those exemptions point to the same tension. The Blumenthal release says countries importing less than 15 per cent of their gas from Russia would be exempt, a nod to the fact that energy sanctions only work when policymakers leave allies and vulnerable buyers some room to function. Technical carve-outs can be revealing.

Trade-finance desks see that before anyone else. A sanctions bill is not just a geopolitical statement; it is a sudden repricing of what can still clear, settle and be insured. An NBER paper, Financial Sanctions and the Global Payments Network, argues that sanctions work in part by severing correspondent relationships. In practice, some flows disappear and others return through longer, less efficient channels.

“Financial sanctions are widely viewed as a powerful tool of economic statecraft, yet direct evidence on their effects remains limited”
Source: National Bureau of Economic Research, Financial Sanctions and the Global Payments Network

Skeptics have a case. The de-dollarisation story often outruns the evidence: the dollar still accounts for about 58 per cent of reported global foreign-exchange reserves, and no rival currency currently offers the same mix of liquidity, legal protection and scale. What sanctions do more reliably is push counterparties into backup plumbing.

Cambridge’s numbers show why that backup network is no longer theoretical. The Cambridge analysis The Decoupling Dilemma notes that China’s Cross-Border Interbank Payment System now spans 4,900 institutions in 187 jurisdictions. That does not make it a dollar replacement. Each round of coercion gives counterparties another reason to test alternatives before they absolutely need them.

Oil-trade reporting shows how that experimentation starts. CNBC reported in June that Chinese buyers of Iranian oil had used opaque settlement channels to reduce exposure to secondary U.S. sanctions. Russia-related trade is bigger and more formal, but the behavioural lesson is similar: when Washington broadens the risk perimeter, counterparties look for less visible channels.

Coverage elsewhere points to the same middle ground. A Semafor analysis argued that Tehran had already blunted part of Washington’s pressure by leaning on alternative financial architecture, while an FT analysis argued that China’s expanding trade-currency footprint still sits inside a system the dollar largely controls. Workarounds can matter before replacements do.

Against that backdrop, the five-biggest-buyers provision matters more than the headline politics. If Washington tells the largest purchasers of Russian energy that access to the U.S. market can depend on where they buy crude or gas, the compliance response begins far from Washington. Invoice currency, routing banks, insurance structures and hedging costs carry the signal.

Why the dollar question persists

From an analyst’s vantage, the near-term risk is not that reserve managers wake up on Monday and dump Treasuries. Marginal hedging is the likelier response. A Reuters analysis on dollar disorder argued earlier this year that investors were already reassessing how much political risk now sits inside dollar assets. That story moves more slowly than a sanctions headline, which is why it lasts.

Hedging logic answers the central market question. A tougher Russia bill probably does not threaten the dollar’s primacy in the way headline-level de-dollarisation claims suggest. Still, it can widen the incentive for reserve managers to diversify a little more into gold, for traders to keep a second settlement channel ready and for non-US partners to ask how politically neutral the dominant system really is. A recent analysis on central-bank gold holdings argued that sanctions risk is one reason official buyers have been accumulating bullion at a 50-year high.

For reserve managers, increments matter. A marginal shift into bullion, a slightly broader renminbi settlement capacity or a second correspondent line for sanctions-adjacent trade does not dethrone the dollar. It does, however, chip away at the assumption that the cheapest and safest route will always be the American one.

“paradoxically accelerated pressures toward the erosion of the liberal economic order”
Source: The Decoupling Dilemma, Cambridge Core

Cambridge overstates the short run and captures the long run. Scale matters more than rhetoric, which is why the dollar remains the system’s core funding and reserve asset. Yet policymakers can still make the system feel less neutral each time they extend sanctions from direct targets to the third countries, cargoes and banks around them.

Washington’s narrower choice is whether maximalist secondary pressure preserves U.S. power better than selective enforcement. The bill’s drafters appear to understand the trade-off. By cutting the tariff threat to 100 per cent from 500 per cent and writing in an exemption for some gas buyers, they make the measure more usable. Calibration, not simple escalation, is the signal.

Markets may read that calibration as the point. Inside the dollar system, the U.S. still has unmatched coercive capacity. Repeated use teaches rivals, and sometimes allies, to keep an extra payments route, a little more gold and a little more legal distance from the system doing the coercing. Friction, not reserve collapse, is the near-term result. Over time, friction is how monetary privilege starts to get priced.