Worlds apart
The global financial system is in danger of fragmenting
The American-led financial order is giving way to a more divided one
Ten years ago your correspondent was fidgeting nervously in a meeting room at VTB Capital, the investment-banking arm of Russia’s second-biggest bank, just across the road from the Bank of England.
During the recruitment process for a graduate job, things had taken a worrying turn.
A Russian missile had shot down mh17, a passenger flight from Amsterdam to Kuala Lumpur, while it was passing over Ukraine.
Plenty of Russian firms were already under Western sanctions owing to the annexation of Crimea earlier that year.
Now sanctions were being ramped up, and VTB Capital’s parent bank was a prime target.
Hence the fidgeting: how to ask the slightly alarming man across the table whether there would even be a VTB in a few months’ time?
Indeed there would be.
VTB’s shop front in the City of London kept busy for years (and briefly employed your correspondent).
Russia’s invasion of Ukraine in 2022 finally prompted severe enough sanctions to shutter the London office, but the business it conducted goes on, now from Moscow.
In a way that would have been unthinkable in the 1990s or 2000s, when the financial order resembled a hub-and-spoke system dominated by America at the centre, VTB still pipes capital to sub-Saharan Africa, eastern Europe and Asia, avoiding Western nodes altogether.
To a Muscovite banker, globalisation is not dead. It simply no longer involves America and its allies.
VTB’s case suggests an epochal shift in the global financial system.
This special report will argue that an array of forces—some long-gestating, others newer—have combined to reduce the system’s dependence on Western capital, institutions and payment networks, and on America in particular.
In view of the dramatic changes to the world’s economic geography over the past few decades, this was perhaps inevitable.
Most obviously, China’s rapid rise has caused its share of global economic output to balloon (see chart).
But many other countries have grown alongside it.
In the early 1990s, today’s ten biggest emerging-market economies accounted for 12% of the world’s output.
They now contribute about a third.
Spreading the wealth
The consequences of this shift will be enormous.
A monolithic system long dominated, for better and worse, by America, has diversified to the point that big chunks of it could conceivably break free and go their own way.
The financial centres of Asian stalwarts like Singapore, Hong Kong and Tokyo, as well as upstarts Shanghai, Beijing and Dubai, are catching up with New York and London.
Many countries’ capital markets have grown up, too.
Whereas hefty stockmarkets were once the preserve of advanced economies, with businesses elsewhere having to look abroad for equity capital, plenty of emerging markets now have thriving bourses of their own.
And countries that once had to raise government debt in American dollars can issue much of it in their own currencies.
There is much to celebrate about this.
In the old hub-and-spoke era of global finance, America’s monetary policy, flighty investors and general mismanagement of banks exported crises around the world (with some help from Europe).
Compared with that, the present, more distributed financial system looks like a source of stability.
Countries have become more resilient to the system’s recurrent volatility and crashes.
Just look at the absence of emerging-market implosions over the past two years, as the Fed has raised interest rates more rapidly than at any point since the 1980s.
Poor countries are also beginning to build vital financial infrastructure of their own, as new national payment systems come online.
Owing to the competitive threat these pose, incumbents are upgrading clunky digital architecture and racing to lower costs.
But danger looms as well.
Rising geopolitical tensions, or full-blown wars, could tug the system apart altogether.
A world in which countries, investors and businesses must pick a bloc and never venture outside it would be a poorer one, and more volatile—and perhaps more prone to conflict.
Financial sanctions, protectionism and a geopolitical realignment of capital flows all bring that fractured world closer.
Frustratingly for countries eager to escape from America’s orbit, these forces have not eroded the dollar’s hegemony over global finance which, relative to its nearest competitors, has only grown.
The result is an uneasy dependence on America’s financial plumbing even as other parts of the system fragment.
A grave new world
It is now the shape of the system itself that is unstable.
Combine the growth of its non-Western poles with the shifting geopolitical distance between them, and it is all too easy to imagine that shape changing suddenly, with unpredictable consequences.
It governs how states, companies and individuals access capital, which determines their prospects for growth and prosperity. Its payment systems are vital to commerce.
And it allows a vastly broader pool of people to share in the world’s wealth creation than otherwise could.
At its best, the system has kept rivals close.
Begin, then, with the forces that are driving them apart.
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