Josh Lipsky on Financial Statecraft, Cross-border Payments, and the Global Status of the Dollar

Episode Summary

Executive Summary: The episode examines geoeconomics, sanctions, and the future of dollar-based payments. Josh Lipsky argues that Russia sanctions were meaningful but less crippling than expected, and that the G7’s use of frozen Russian reserves to fund Ukraine shows innovative financial statecraft. He warns that alternative payment rails and digital currencies could erode U.S. sanctions leverage unless the dollar infrastructure is technologically upgraded.

Main Topics: Geoeconomics and the Atlantic Council's GeoEconomic Center (Priority: 5/5): Lipsky explains why he created a center at the intersection of national security, finance, and foreign policy, arguing that geoeconomics is not new but has been rediscovered in the West since Russia’s invasion of Ukraine. Russia sanctions and financial statecraft in the Ukraine war (Priority: 5/5): The discussion reviews the scale, mechanics, and limits of sanctions on Russia, including blocked reserves, de-SWIFTing, energy exceptions, and the role of the G7 in coordinating measures. Using Russian assets to finance Ukraine (Priority: 5/5): Lipsky walks through the G7 plan to use future interest earnings on blocked Russian reserves to raise about $50 billion for Ukraine, while avoiding the legal and geopolitical costs of outright confiscation. Lessons for future sanctions design, especially China (Priority: 4/5): The conversation shifts to what Russia taught policymakers about building sanctions with economists in the room, and how a Taiwan crisis involving China could trigger massive market disruption and limited sanctions options. Upgrading the dollar and cross-border payment systems (Priority: 5/5): Lipsky argues that the dollar may remain dominant while still becoming strategically vulnerable if the West fails to modernize payments infrastructure and compete with alternative financial plumbing. China-led payment innovations and wholesale CBDCs (Priority: 5/5): He highlights CIPS, mBridge/Enbridge, and BIS-led wholesale CBDC projects as efforts that can settle cross-border transactions faster and outside the dollar system, potentially reducing U.S. leverage. Stablecoins, FedNow, and the future of U.S. payments leadership (Priority: 4/5): The episode closes by contrasting domestic real-time payments with global settlement systems, and by suggesting stablecoins and wholesale CBDC may help the U.S. stay competitive if properly regulated.

Key Arguments: Sanctions are effective only when designed with macroeconomic expertise, legal authority, and allied coordination; otherwise they are more symbolic than decisive. The Russia sanctions hurt Moscow, but not nearly as much as initial expectations because energy exports were partly exempt and Russia adapted with capital controls and Chinese backfilling. Blocking Russian reserves was unprecedented and strategically powerful, but outright confiscation would create major rule-of-law and reserve-asset credibility concerns. Using future interest on blocked assets is a creative compromise that delivers large-scale aid to Ukraine without fully seizing sovereign reserves. In a Taiwan crisis, the global market reaction could be immediate and severe even before sanctions are imposed, making broad sanctions on Chinese banks extraordinarily costly. The dollar can be simultaneously strong in macro data and strategically vulnerable if countries build alternative payment infrastructure that bypasses U.S. jurisdiction. CIPS, mBridge/Enbridge, and similar systems matter less for current scale than for rapid growth and their ability to create non-dollar settlement rails. The U.S. should upgrade rather than defend the status quo in payments technology; otherwise private and foreign systems may become the default for cross-border finance. Wholesale CBDC is different from retail CBDC because it is mainly about faster interbank settlement and does not raise the same privacy concerns. Stablecoins are the most relevant private-sector analogue to digital money and may accelerate digital dollarization abroad if regulation remains unclear.

Data Points: Russia total reserve assets: $600 billion - Total foreign reserve assets referenced in Russia’s balance sheet before sanctions. Russia assets held outside Russia: about $300 billion - Portion of reserves accessible to Western authorities for blocking/freeze actions. Russia assets blocked/frozen: about $280 billion - Estimated amount currently blocked, mostly in Europe. Russian assets held in euros: about $220 billion - Predominantly euro-denominated reserves held in Euroclear in Belgium. Interest earnings on blocked assets: $4 billion to $5 billion annually - Estimated annual interest generated by the blocked reserves parked in ECB/overnight facilities. Ukraine financing package: $50 billion - G7 plan to use future interest earnings from Russian assets to support Ukraine. Future interest horizon: 20 years - Number of years of future earnings effectively pulled forward to create the $50 billion package. U.S. aid to Ukraine: $175 billion - Approximate cumulative amount referenced by the host as U.S. support for Ukraine. Share of Russia FX reserves in dollars at New York Fed: about 7% - Approximate portion of Russia’s reserves held in dollars in the United States. CIPS size relative to SWIFT: about 8% to 9% of SWIFT banks - Lipsky describes China’s CIPS as having a much smaller network than SWIFT but growing quickly. CIPS growth: doubled in the past two years - Indicator of rapid expansion of China’s alternative payment rail. Potential global market drawdown in a Taiwan crisis: 10% to 15% in 48 hours - Estimated immediate market reaction even before sanctions are imposed. Potential exposure from sanctioning China’s big four banks: about $3 trillion - Estimated amount immediately at risk in the global economy if major Chinese banks were sanctioned. BIS Enbridge founding members: 5 central banks/jurisdictions - People’s Bank of China, Hong Kong Monetary Authority, Thailand, UAE, later joined by Saudi Arabia. CBDC staffing at PBOC: 300 people - Lipsky cites the scale of resources China dedicates to digital currency issues. Stablecoin peg concentration: 98% to 99% pegged to the dollar - Lipsky notes that nearly all fiat-backed stablecoins are dollar-backed. Cross-border payments touching dollars: 80% - Used to illustrate the dollar’s continuing dominance in payments.

Pivotal Quotes: "The dollar can be both healthy and weak at the same time." — Josh Lipsky: He uses this line to explain why macro indicators can show dollar dominance while sanctions-focused analysis shows strategic vulnerability. "We need to upgrade the dollar." — Josh Lipsky: Central thesis of the discussion on payment innovation, cross-border settlement, and maintaining U.S. financial power. "If we aren't involved, I do worry about what grows up in the absence of US leadership." — Josh Lipsky: He argues that the U.S. must engage in wholesale CBDC and modern payment systems to preserve sanctions effectiveness and financial leadership.

Implications: The episode suggests U.S. power will depend less on reserve share alone and more on payment-tech leadership, allied coordination, and legal credibility. If the West fails to modernize, rivals and private rails could slowly reduce sanctions leverage.