A few days ago, Sri Lanka’s Foreign Minister and Deputy Minister of Finance met the Russian Ambassador to discuss the possibilities of buying Russian oil. This move took many by surprise, because from the inception, the so-called Leftist Government had been avoiding Russian invitations and investment proposals, particularly in the energy sector.
For years, Sri Lanka has shown hesitancy to engage with Russia despite repeated overtures, prioritising a pro-Western alignment that, as recent developments suggest, may have left the country strategically vulnerable.
Russians are known globally for pursuing stability rather than short-term gains as a strategy. In that context, it is unclear what our strategy is moving forward in terms of ensuring the stability of the energy sector. While domestic policies have leant heavily towards Western-aligned economic prescriptions, the evolving global energy landscape demands a more diversified approach.
Russian President Vladimir Putin himself invited Sri Lanka’s President to the BRICS summit, which, regrettably, was declined. This was a golden opportunity for Sri Lanka to step into the emerging world order. Without an invitation from a full member country, participation in a BRICS summit is not even conceivable. The refusal to engage not only missed a diplomatic opportunity but also signalled reluctance to align with the growing multipolar economic world.
However, the recent meeting with the Russian Ambassador carries a significant positive implication. Russia has agreed to provide oil to Sri Lanka, and reportedly, subject to a single condition: payment must be made in Russian Rubles or Chinese Yuan, rather than US Dollars. This requirement marks a subtle yet potentially transformative shift, highlighting a path towards reducing dependency on the US Dollar, which has dominated global transactions for decades.
Additionally, it is also learnt that Russia has emphasised the strategic importance of its previous proposals to establish nuclear power plants in Sri Lanka. Such energy infrastructure is not just a matter of electricity generation; it is foundational to the country’s long-term energy sovereignty.
Taken together, these developments suggest that Sri Lanka’s engagement with Russia could be a turning point, signalling the first steps towards stabilising the economy and securing strategic autonomy in the energy sector.
Dependency by design: How policy choices weakened the economy
Today, Sri Lanka remains entirely dependent on US Dollar settlements for foreign exchange and cross-border payments. The Central Bank of Sri Lanka (CBSL) maintains US Dollars in reserves primarily to facilitate foreign transactions and strengthen its balance sheet. The only international payment system in operation is Society for Worldwide Interbank Financial Telecommunication (SWIFT), which is controlled by the United States.
At this point, Sri Lanka has not accumulated any alternative currencies such as yuan or ruble as reserve assets, nor has it developed an alternative payment mechanism to facilitate settlements in these currencies. This was a deliberate policy choice, reflecting a long-standing preference for alignment with the Western-dominated global financial system. Yet, the cost of this decision is now becoming painfully evident.
Adding to the challenge, Sri Lanka has failed to maintain a productive relationship with Russia, which could have allowed access to oil on credit. The lack of foresight and strategic thinking has left the country economically vulnerable. The path adopted – a pro-American, International Monetary Fund (IMF)-led neoliberal economic programme – has obstructed progress at every step, limiting the country’s economic autonomy.
Meanwhile, US policies continue to demonstrate the risks inherent in dependence on a single hegemonic power, as Washington has repeatedly betrayed its so-called vassal states while pursuing global dominance through unwinnable wars.
The great realignment: War, oil and the shift to a multipolar world
The geopolitical context adds an additional layer of urgency. Iran’s objectives are clear: the Government has publicly declared its aim to expel American forces from the Middle East, which implies the likelihood of prolonged conflict. American military bases in the region represent an existential threat to Iran, a reality that is now apparent to all observers.
This conflict also limits Israel’s ability to expand its hegemony in the Middle East, as the country relies heavily on US bases to conduct military operations. The ongoing confrontation could prove to be a defining moment in the history of the American empire, exposing structural vulnerabilities and testing the limits of US global influence.
Iran has effectively weaponised energy, demonstrating how oil can be used as leverage in global geopolitics. The ongoing conflict is already affecting oil, gas, electricity, and transport worldwide, leading to soaring prices. Most countries are experiencing shortages and rising costs, placing severe pressure on societies.
Energy scarcity is only the most visible aspect of the crisis. There are hidden layers of impact, including the potential for a global food crisis. One-third of the raw materials used for fertiliser passes through the Strait of Hormuz, meaning any disruption could ripple across global agriculture.
The conflict’s economic repercussions extend far beyond the Middle East. Many pro-Western ‘bubble economies’ in the region, including Dubai and Qatar, can no longer claim to be safe havens. The crisis has exposed vulnerabilities in food security, water supply, and the safety of residents, alongside the political hypocrisy of claiming neutrality while functioning as logistical supporters of US war efforts. These countries are projected to lose at least 25% of their Gross Domestic Product (GDP), with potential spillovers into financial, stock, and housing markets.
For decades, these Middle Eastern states have sold crude oil exclusively for US Dollars, investing their surpluses in US assets such as Treasuries. Even Asian economies such as Japan, South Korea, and India have accumulated US-denominated assets.
However, many countries are now shifting away from the dollar, selling US assets and adopting alternative currencies such as the yuan, signalling a challenge to dollar hegemony. This ‘de-dollarisation’ marks the beginning of a new world order, led by Russia, China, and Iran. Reduced global demand for the US Dollar will weaken its value relative to other major currencies, undermining the economic foundation of the US empire.
Scarcity and inflation: The coming economic squeeze
For ordinary Sri Lankans, the immediate consequences of these global developments are tangible. Shortages and rising prices of fuel and gas are putting immense pressure on daily life. In the medium term, the crisis may escalate into a full-blown energy shortage, with rolling blackouts and continued price hikes exacerbated by low-quality coal purchases.
The spike in fuel and fertiliser costs will inevitably drive food prices higher and could lead to local scarcity, given the broader disruptions in global supply chains. Rising commodity prices will strain Sri Lanka’s foreign reserves, which may not be sufficient if high prices persist over time. The pressure on reserves will contribute to further depreciation of the local currency, fuelling inflation in the second half of the year.
In response, the CBSL may feel compelled to raise interest rates, repeating the contractionary measures of 2022. While such interventions can curb inflation temporarily, they are insufficient without fresh dollar inflows to stabilise the economy and restore investor confidence. Moreover, substantial foreign debt repayments are already scheduled, creating an additional burden.
Extended conflict in the Middle East could shrink regional economies, reducing remittances and impacting tourism due to travel disruptions and rising flight costs. Together, these factors threaten to deepen Sri Lanka’s foreign debt trap, reinforcing cycles of economic vulnerability.
Petrodollar declines as gold, yuan, ruble rise
The US Dollar’s dominance in global finance has been maintained for over 50 years, largely due to its role as the primary reserve currency.
Before 1971, the Bretton Woods system linked the dollar to gold reserves. Afterwards, the dollar’s value was supported by petroleum sales from oil-producing countries, giving rise to the concept of the ‘petrodollar’. Oil-exporting nations sold crude for USD and invested surpluses in US assets in exchange for American protection of their regimes.
These arrangements have long benefited monarchies in oil-rich regions, often at the expense of local populations. Ordinary citizens frequently bear the brunt of inequality while ruling elites accumulate wealth, a system initially facilitated by colonial powers and maintained by the US after independence.
This exorbitant privilege has allowed the US to issue currency without constraints, borrow at low cost, enforce sanctions, extract foreign surpluses, and engage in military operations against sovereign countries – often those attempting to trade oil in alternative currencies. Iraq, Libya, Syria, Venezuela, and Russia all illustrate this pattern, highlighting the weaponisation of the US Dollar in global geopolitics.
In response, countries like Iran have begun partnering with Russia and China, using alternative currencies such as the yuan and ruble for international trade. Central banks in the Global South are also increasing gold holdings to strengthen their balance sheets and reduce dependence on US assets. After decades of dominance, gold is experiencing a resurgence as a trusted reserve, driving up global prices and signalling a slow but steady shift towards a multipolar financial system.
Sri Lanka’s Central Bank, however, remains reluctant to embrace this new reality. The war and global energy shifts highlight the urgent need to bypass the dollar and align with alternative financial systems to protect sovereignty. One clear example is Iran’s stipulation that oil sold through the Strait of Hormuz be transacted in non-dollar currencies, demonstrating the leverage and strategic value of alternative reserves.
Conclusion
In conclusion, Sri Lanka’s recurring cycles of external indebtedness are rooted in a low degree of monetary sovereignty combined with IMF-enforced deregulations. Foreign capital inflows have historically been designed not to build productive capacity but to address trade imbalances and capital flight, perpetuating dependence and subordination to international creditors.
The current global conflict and energy realignments provide Sri Lanka with an opportunity to break from this cycle. Abandoning the IMF-neoliberal model, adopting alternative currencies for cross-border trade, and partnering strategically with Russia could secure energy sovereignty and restore a measure of economic autonomy.
Our aim should not be limited to short-term purchases of low-cost fuel. Instead, Sri Lanka should pursue a long-term partnership with Russia to ensure energy independence. Just as American politicians cannot bomb their way to global liberation, Sri Lankan leaders cannot rely on deception to achieve economic resilience.
(The writer is a graduate of Monash University, Melbourne, Australia; an entrepreneur; and the author of the book ‘Wikalpa Maga – De-Dollarization’)
(The views and opinions expressed in this article are those of the writer and do not necessarily reflect the official position of this publication)