Malaika Shamim Alam
De-dollarization
The dollar has been the standard currency in world trade for many years, Oil, gold, and the majority of commodities are quoted in dollars, making the dollar the predominant currency in international trade. Many nations predominantly hold U.S. Treasuries as part of their dollar reserves. De-dollarization is the term used to depict a transition from this world order to one where countries sell their U.S. Treasury bonds and keep reserves in other fiat currencies or gold. At the same time, they try to use their currencies for transactions between their main trading partners. While the U.S. dollar is likely to continue to play a pivotal role for some time, structural trends are beginning to diminish its significance.
Saudi Arabia has been constantly making an effort for building a strategic economic partnership with China and enhancing its security alliance with the United States. However, the two great powers are continuously involved in tense power competition.
The U.S. dollar’s rise to global dominance is due to its role as the de facto currency used in global commodity markets. Commonly known as the petrodollar, the requirement that the massive value of world oil sales is denominated in dollars went a long way in ensuring the currency’s credibility, particularly after the U.S. left the Bretton Woods system of monetary administration in 1971, which provided the alternative of Gold bullion. Saudi Arabia has traded its oil exclusively using the U.S. dollar since 1974. That was the year Riyadh signed a deal with the United States to use only the dollar for oil trade in exchange for solid security guarantees. This marks the birth of the petrodollar. This further strengthened the dollar’s status as a reserve currency.
But since the outbreak of war, and the imposition of more economic Western sanctions on Russia in response, Moscow has only accelerated the de-dollarization process. After Russia was banned from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system, which banks around the world use to transfer money, Russia first raised its interest rate to 20 percent to protect the ruble and introduced more capital controls to prevent it that excessive currency is leaving its shores and insisting that all unfriendly countries pay only in rubles for its enormous fossil fuel exports. More recently, Russia has been busy agreeing with bilateral fuel deals with several countries that included at least partial payment in rubles rather than dollars. For example, it signed a roadmap for economic cooperation and trade with Turkey worth US$100 billion a year, with Ankara agreeing to pay for gas imports in rubles. Turkey also confirmed that five of its commercial banks would use Russia’s Mir payment system to help Russian tourists in Turkey use their currency.
Domestically, meanwhile, Russia’s largest exchange, the Moscow Stock Exchange, announced on August 8 that it would halve the maximum threshold of dollars it can accept as collateral for transactions from 50 percent to 25 percent. Dollars exceeding this limit would have to be converted to friendlier alternatives. And the Moscow Stock Exchange has also started trading Chinese yuan-denominated bonds to attract Asian investors and further diversify away from the greenback. Chinese yuan-denominated debt provides Russian borrowers with an additional source of foreign exchange liquidity, said Gleb Shevelenkov, head of the debt market at the Moscow Exchange Dollar status as a world reserve currency. And its recent forays into Middle Eastern markets, particularly Saudi Arabian oil, could ultimately go a long way in tipping the scales in favor of widespread adoption of the Asian superpowers’ currency.
Saudi Transition from Washington to Beijing
Saudi Arabia sided with Putin in the Ukraine conflict, reflected by Saudi Silence over the invasion. Iran has also inched closer to Asia and the Western sanctions pushed Russia closer to China. With the shift of Saudi Arabia towards the revisionist states, the dollar’s tight grip on global trade and its status as the world’s reserve currency is being viewed with increasing suspicion by a host of countries as Yuan surpasses the dollar and became the most traded foreign currency on the Moscow exchange. It has dramatically improved the global profile of Chinese yellow currency and profoundly disrupt the global dominance of petrodollars. Yuan has already surpassed Australian and Canadian dollars. With China expanding billions of dollars in investment funds to Saudi Arabia this year and ties between President Xi Jinping and Crown Prince Mohammed bin Salman on the rise, things will therefore turn in favor of the East swiftly. The dynamic has changed dramatically. The relationship between the USA and the Saudis has changed. China is the world’s largest importer of crude oil and offers the kingdom many lucrative incentives.
Since Russia launched its attack on Ukraine in February, Saudi Arabia has actively refused to heed Biden’s calls to expand crude oil supply quotas and reduce global oil prices. Instead, the OPEC+ alliance of OPEC members, Russia, and other allied producers stuck to their original plan of keeping oil prices high.
China’s Strategic Partnership instead of Alliance
After the 25-year cooperation agreement with Iran in 2021, China seeks to set up a new paradigm by seeking a joint strategic partnership deal with Gulf Cooperation Council countries to advance Global Development Initiative (GDI) and follow through on the vision 2030. These visions aim to change the composition of Gulf economies by diversifying them away from oil and gas to meet the needs of gulf states. It is important to understand the global transformation that resulted from three major crises that the world has faced, the 2008 financial crisis, the Covid-19 crisis, and most recently the energy and commodity crises, following the Russia and Ukraine conflict. All of these have convinced the majority of the world especially the U.S., China, and Europe that the form of globalization, pursued over the last decade is unsustainable and now it is transitioning to three major hubs of globalization. One controlled by the U.S. and North America repatriating technologies and building self-sufficiency in terms of food, energy, and manufacturing capabilities. Western Europe is the second and Asia, dominated by China is consecutively third in the row. Therefore, it became very important for the rest of the world especially the Middle East and the African continent as a whole to think about repositioning themselves in this new geo-political and economic map. To decide if they continue to be a satellite to a particular dominant set of countries or if they want to reposition themselves as a strategic partner with the rest of the global economy. It seems like the three hubs hold different views to interact with the global south and middle east. China seems to have the most attractive approach from a Gulf state perspective, like offering mega projects in building partnerships on equal terms and complementarities of strategies on a comprehensive set of issues as opposed to the hierarchical policy followed by Washington. Taking it as an opportunity China is following a zero-enemy policy in the Gulf. While perusing its national interests it has adopted a balancing diplomatic strategy between Saudi Arabia and Iran.
In the quest of articulating nuanced influence by attempting to balance between the soft and sharp power application mechanisms, China has employed an easily substitutable and highly flexible diplomatic practice in its foreign policy. Using a variety of economic levers, Beijing encourages partner countries to take China’s policy interests into account, coupled with the degree of attractiveness of the authoritarian model. In addition, it has successfully directed the international discourse on the policies of several countries to create a global environment conducive to better protect China’s interests abroad. For instance: AIIB, BRI, BRICS, APEC, direct investment, financial assistance, expansion of bilateral trade, and the creation of FTAAP.
Beijing does not make allies it makes partners. The idea of creating a network of partnerships has become a successful practice to strengthen and expand China’s ties with other countries.
“Dialogue, instead of confrontation and strategic partnership, rather than of alliance”
Today, with Europe’s reluctance towards Russian crude oil to China’s growing soft power influence in Eurasia, it seems that the inevitable transition of the U.S. dollar could happen sooner than initially anticipated-if anticipated at all!
