A Military Treasure Chest: The Taliban Can Destroy the Dollar

Economists warn of a threat

The Taliban’s takeover of Afghanistan may threaten the stability of the dollar. (The Taliban is a terrorist organization that is banned in Russia.) A former employee of a leading American investment bank warns that geopolitics could affect the U.S. dollar.

Losing Ground

The leading role of the U.S. dollar is being disrupted by various processes that have been occurring in the international financial system, especially the strengthening of the euro and yuan. The Afghan factor might become a catalyst for future devaluing of the dollar. Jim O’Neill, chairman of Goldman Sachs Asset Management and former British Commercial Secretary to the Treasury, has outlined this opinion in his article on Project Syndicate.

The economist draws attention to the fact that the dollar has already survived enormous shocks and upheavals, including the fall of Saigon in 1975 and the fiasco that accompanied the U.S. invasion of Iraq in 2003. However, the situation then was different from the situation now. A majority of countries did not aim to have their currency float freely in relationship to the dollar; countries that did have a sufficient economic presence to affect the global currency system, such as Japan, Germany and China, consciously chose not to do anything. For example, China refused to expand the presence of the yuan on financial markets (both Chinese and global) for the longest time. Furthermore, the U.S. was putting all its efforts into keeping the current system afloat.

The Process Has Begun

The long weakening of the dollar is demonstrated by data collected by central banks concerning the foreign exchange reserves. According to data from the European Central Bank, in 2018 the share of U.S. dollar reserves held by central banks fell to 61.7%, the lowest it had been over the past 20 years. In 2020 it fell to below 60%, something that had not happened since 1995. A lot of this is connected to the actions of American financial powers. During the height of the pandemic, the Federal Reserve started printing money like never before in order to saturate the suffering economy with as many dollars as possible. Of course, this weakened the U.S. dollar.

Experts from JPMorgan Chase & Co. have also warned that the dollar risks losing its status as a foreign exchange reserve currency in the near future. The dollar achieved its current favored position due to the strength of the American economy. However, now the driving factors behind economic growth are moving steadily in the direction of Asia. The center is now China, which has increased its gross domestic product fourfold over the past 70 years. Currently, China’s GDP is 20% and the U.S.’ is 24%.

O’Neill also points out this fact and writes that the International Monetary Fund will start working on a five-year-long review of the composition and valuation of the Special Drawing Rights basket*. If, at the end of this review, the yuan share in the basket has increased, the international monetary system will unavoidably evolve.

The weakening of the dollar — both as the only and the primary reserve currency — began at the start of the 21st century. Mikhail Koroliuk, of the investment firm Solid, states that it is possible that this process will continue to take place over the coming decades, until the dollar is reduced to simply one of the reserve currencies.

A Suffering Reputation

Will the above-described process be quickened by the Afghanistan factor? On the one hand, the victory of the Taliban will not affect the American currency economically in any way, for the influence of Afghanistan on the global economy is minuscule.

Mikhail Nikitin, vice president of Borsell, states that in the abovementioned case, the only possible scenario leading to the dollar’s collapse is if the U.S. is dragged into another big and expensive war in Afghanistan.

“Joe Biden was the biggest supporter of the withdrawal of U.S. troops from Afghanistan. The next congressional elections are more than a year away, and the next presidential election more than three years away. Thus, the voters will have time to calm down and forget about Afghanistan. Therefore, without some sort of sudden catastrophe, the dollar will keep rising and falling, completely irrespective of the actions of the Taliban,” Nikitin claimed.

“The situation that has been created in Afghanistan is threatening the U.S.’ reputation in certain ways, but it should not affect the American currency in any significant manner. The reason behind this is that the American dollar, like other ‘safe haven’ currencies such as the Swiss franc, is considered an asset that increases in value proportionally as global risks increase,” added Mikhail Bespalov, an analyst at KSP Kapital.

According to Koroliuk, O’Neill is evaluating psychological consequences: The exposure of the limits of American power can significantly quicken the process of the dollar’s decline.

This opinion is shared by Western experts as well. The lightning-quick fall of Afghanistan’s current government raises questions about the U.S.’ standing in the eyes of its allies as well as its enemies, writes MarketWatch. However, the dice could fall another way as well: The actions of the U.S. concerning Afghanistan could also raise concerns about China’s power.

A Huge Arsenal

On the other hand, the 40 million people of Afghanistan now hold an enormous arsenal. After the withdrawal of U.S. troops, the Taliban captured billions of dollars’ worth of weapons and military technology, from M-16 rifles to armored Humvees, which had been provided to the Afghan government by the U.S. Furthermore, this “military treasure chest” holds UH-60 Black Hawk helicopters, Embraer EMB 314 Super Tucano aircraft, drones and night-vision equipment.

“Everything that had not been destroyed now belongs to the Taliban,” an anonymous U.S. representative told Reuters.**

“This can lead to the flare-up of local conflicts, especially with other Middle Eastern countries like Iran. As a result, there could be a sudden increase in the price of energy carriers, which can hit the dollar painfully, as the American economy is on its way to going green. Afghanistan is called the graveyard of empires for a good reason. Therefore, the seemingly harmless withdrawal of the U.S. could spark new fires in the Middle East,” mused Semyon Tenyaev, general director of the VBC group.

Vitaly Mankevic, president of the Russian-Asian Union of Tradesmen and Entrepreneurs, also points to the fact that the takeover of an entire country by a terrorist organization can influence the U.S. dollar. This influence could be ambiguous. For instance, the expansion of the jihad in the direction of Central Asia and India can decrease the speed of economic growth and negatively affect raw material quotas. Paradoxically, this would lead to the growth of the U.S. dollar. On the other hand, the withdrawal of American troops can lead to a decrease in dollar shares in the region and a move toward national currencies, primarily the yuan — which will, of course, negatively affect the dollar.

*Editor’s Note: The Special Drawing Rights basket is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. The value of the SDR is based on a basket of five currencies — the U.S. dollar, the euro, the Chinese yuan, the Japanese yen, and the British pound sterling.

**This quote, though accurately translated, could not be independently verified.