Is the global financial system fracturing under geopolitical pressure?

The 2025 issue of the Geneva Report examines how rising geopolitical tensions—such as Russia’s invasion of Ukraine, U.S.–China rivalry, and President Donald Trump’s tariffs—are reshaping international finance. These tensions threaten to split the world into rival blocs, reversing decades of growing global integration in both trade and finance. Gian Maria Milesi-Ferretti, a senior fellow in the Hutchins Center on Fiscal & Monetary Policy in the Economic Studies program at the Brookings Institution, is one of the co-authors of the data-rich report. Here are some of the highlights. (The authors will discuss their findings at Brookings the morning of October 20; you can watch the event live here.)

Economists have long argued that trade in goods and services can benefit both exports and importers, but why does financial integration matter?

Financial integration allows countries to share risks, borrow more cheaply, and invest and allocate production more efficiently across borders. It also allows countries to borrow and lend internationally—for instance, to boost investment when return opportunities increase. Fragmentation undermines these benefits, raising the chance of financial crises and making it harder to mount coordinated responses when crises occur. What evidence of fragmentation do we already see?

• Foreign direct investment (FDI): Flows are increasingly concentrated within geopolitical blocs, especially in strategic industries like semiconductors.
• Russia: After the 2022 invasion of Ukraine, Russia pivoted almost entirely away from Western finance, halving its external liabilities.
• China: It has gradually reduced its exposure to U.S. assets, lending more to emerging markets and using offshore financial hubs.
• Advanced economies: The U.S. and allies have deepened ties with each other, while pulling back from China.

What does this mean for emerging markets?

Emerging market and developing economies (EMDEs) are especially vulnerable. They rely heavily on investment from Western countries. If geopolitical divides weaken these links, EMDEs could face reduced inflows and higher borrowing costs. Also, higher geopolitical tensions can imply more frequent financial shocks.

What does this mean for the U.S. dollar’s role in the global financial system?

The U.S. dollar still dominates: It accounts for nearly 60% of global reserves and is used in 90% of foreign exchange transactions. The euro plays a strong but more regional role. The renminbi’s market share is growing but still modest (around 2% of reserves).

Geopolitical tensions are playing a role here: Countries distancing themselves from the West (e.g., Russia, Belarus, and even Turkey) are reducing use of dollars and euros to shield themselves from sanctions, while central banks are buying gold with their holdings now approaching levels not seen since1965 in the Bretton Woods era. History shows that the role of international currencies can remain stable for a long time, then shift quickly.

Why are payment systems politically sensitive?

Payment systems—like SWIFT for messaging or CHIPS for settling dollar payments—used to be seen as neutral. That changed when U.S. secondary sanctions (from 2010) and Russia’s exclusion from SWIFT (2022) showed how they could be wielded as geopolitical tools. In response, countries like China (CIPS), Russia (SPFS), and Iran (SEPAM) have built alternative systems, though these remain less widely used.

What about stablecoins?

Stablecoins are privately issued digital tokens pegged to traditional currencies, mostly the U.S. dollar. Their issuers hold large reserves of safe assets such as U.S. Treasuries. As stablecoins grow, they may boost demand for dollar assets and reinforce the dollar’s global role. At the same time, they raise new risks: regulatory gaps, potential instability if reserves are questioned, and the possibility of adding further fragmentation if national rules diverge. In short, stablecoins could both entrench dollar dominance and complicate global financial governance.

What does all this mean for the global financial safety net?  

The global financial safety net includes countries’ foreign reserves, lending from the International Monetary Fund (IMF) and regional funds, such as Europe’s ESM or Asia’s Chiang Mai Initiative, and central bank swap lines. This safety net provides essential liquidity in crises, both individual country crises or global crises. The size of the safety net has grown to about 20% of world GDP, but it is uneven: Advanced economies have more reliable access, while EMDEs face gaps. Rising geopolitical rifts could make coordination harder, weakening the net just when it’s needed most.

What are the risks if fragmentation deepens?

• Higher costs: More expensive borrowing, slower payments, and duplication of systems.
• Instability: Greater volatility in exchange rates, capital flows, and trade.
• Weaker sanctions: If countries can bypass Western systems, sanctions lose impact.
• Multipolar currencies: Multiple rival reserve currencies could fragment global liquidity and complicate crisis responses.
• Strain on global institutions: The IMF and G20 could struggle to coordinate in crises if political divides block cooperation.

Is fragmentation inevitable?

No. The trajectory depends on whether major economies can sustain trust, uphold institutional credibility, and preserve cooperative mechanisms. But trends in FDI, payments, and reserve management already show fragmentation pressures building.

What policy recommendations does the report make?

Many countries remain committed to openness in trade and finance as well as to maintaining a rules-based international order. But geopolitical tensions and economic nationalism highlight the urgent need for pragmatic approaches to safeguard economic stability and cooperation. Among the policy recommendations in the report are the following:

• Recommit to multilateralism. Stronger cooperation across countries remains the best safeguard against fragmentation.
• Multilateral institutions like the IMF and World Bank should give emerging economies more voice and voting power.
• Strengthen ties between the IMF and regional financial safety nets can help in responding effectively to crises.
• When broad consensus is difficult, smaller groups of like‑minded states (coalitions of the willing) can still make progress on issues transcending borders, ranging from trade to financial supervision and regulation, as well as climate or international taxation.
• Improve cross-border data sharing, which is essential to better understand financial linkages across countries and regions.
• Improve transparency in debt restructuring. Encourage disclosure of loan terms and evolve frameworks to include new creditors, such as China.
• Exercise caution in economic statecraft. Sanctions and other financial tools should be used carefully to avoid undermining trust in global systems.
• Safeguard payment systems. Enhance interoperability, update infrastructure, and ensure consistent regulation of innovations like stablecoins.