Home ›› 29 Apr 2023 ›› Opinion
The USD hegemony is in decline. It was unthinkable just a few years ago. Now, it is a burgeoning reality as economies from Asia, South America, Africa, the Middle East, and even ASEAN have reduced their dependence on the US dollar. The idea of “de-dollarization,” or reducing a country’s reliance on the dollar, has gained momentum: from Russia to China to many non-aligned countries in between. There is a fear that overreliance on dollar gives the United States too much leverage and thus countries are opting for other currencies.
The US’ weaponization of dollar and SWIFT is a Sword of Damocles for anyone and everyone who would disgruntle the US. The trigger for ongoing de-dollarisation was the West’s “shock and awe” sanctions imposed on Russia for its special mili-tary operation against Ukraine in February 2022. This somehow raised the thinking among others that “if you do it to Rus-sia, China, Iran, Cuba, Venezuela, you can do it to us too." The US has sanctioned, who do not adhere to the policies of the US and other western powers, over 24 countries - unilateral or partial trade sanctions.
These sanctions, nevertheless, have turned out to be detrimental to the economies of the Group of Seven (G7) nations and have begun to impact the US dollar’s hegemony in world trade. The increasing number of countries that are joining the bandwagon of de-dollarisation raises questions that whether this shift is only economic or is there some other underlying factor coaxing this transition.
A “new global commercial bloc” has risen to the fore, while alternatives to the western SWIFT banking messaging system for cross-border payments have also been created. Iran has also proposed to the Shanghai Cooperation Organization (SCO) a euro-like SCO currency for trade among the Eurasian bloc to check the weaponization of the US dollar-dominated global financial system. The INSTC was planned as a 7,200-km-long multimodal transportation network including sea, road, and rail lines to carry freight between Russia, Central Asia, and the Caspian regions.
In 2017, the ruble-yuan “payment against payment” system was implemented along China’s Belt and Road Initiative (BRI). In 2019, the two countries signed an agreement to replace the dollar with national currencies in cross-border transactions and converted their $25 billion worth of trade to yuan (RMB) and rubles. Russia has been working to establish currency swap agreements with a number of trading partners, comprising the five-member Eurasian Economic Union (EEU), which includes Russia, Armenia, Belarus, Kazakhstan, and Kyrgyzstan. Iran and the EEU have recently concluded negotiations on the conditions of a free trade agreement covering over 7,500 categories of goods. With the new Iranian year that began on 21 March, 2023, a market with a potential size of 700 billion dollars has become available for Iranian goods and ser-vices.
India and Malaysia agreed last month to settle trade in Indian rupees. In fact, at least 18 countries have struck a deal with India to trade in rupees. These include traditional US allies – the UK, Germany, New Zealand, Israel and the United Arab Emirates (UAE) – they all signed up to by-pass the greenback in their trade with India. In recent months, Brazil and Argenti-na have discussed the creation of a common currency for the two largest economies in South America. Brazil and China also announced at end-March they had agreed to no longer use the dollar and would instead use local currencies. This is a precursor to another significant transition, no doubt!
The BRICS nations – Brazil, Russia, India, China, and South Africa – have announced plans to develop a new reserve curren-cy to better serve their economic interests. Turkey has also opted to circumvent dollar in many aspects. Currently, Turkey conducts business utilizing the national currencies of China (yuan) and Russia (ruble). The 10-nation ASEAN bloc is also strongly considering ways to lessen its dependence on the US dollar euro, yen, and pound sterling from financial transac-tions and shifting to settlements in local currencies. News suggests Cairo may be joining a growing trend of nations taking measures to undermine the US's financial hegemony. For the last five decades, virtually all energy from the Persian Gulf was sold in US dollars. Now China is buying a French company’s LNG from the UAE in yuan as confirmed on March 28. The US economic hegemony that heavily relied on the petrodollar system since the 1970s appears to be waning, with an alter-native or at least a parallel system establishing itself rapidly. If this wasn't historic enough, the China-France-UAE deal will certainly be eclipsed by the impending move by Saudi Arabia to accept yuan instead of dollars for Chinese oil sales.
It will be a seismic event if Saudi Arabia ditches the dollar for its oil sales to China and others. This is because Saudi Arabia is the reason the petrodollar system exists, where all oil sales globally are traded in US dollars. In 1973, after gold standard was aborted, the US and Saudi Arabia agreed to accept only dollars for oil. Consequently, petrodollars spread beyond oil to every aspect becoming the global currency. A breakdown in the petrodollar system will undermine its position as the world’s leading superpower, exactly what Russia and China are hoping for. The situation germinated when the US and Eu-rope imposed oil sanctions on Iran in 2012; a decade later, the 2022 Russian oil sanctions seem to have firmly put the ‘de-cline of the petrodollar’.
Currently, official transactions between India and Bangladesh are conducted in US dollars, which are then converted to the Indian rupee or the Bangladeshi taka. This results in conversion losses for both sides, making trade between the two coun-tries more expensive. For Bangladesh, trading in local currency, namely Indian Rupee, would reduce the pressure on foreign currency reserves due to the large volume of payments to India that is presently trading in rupees with Russia, Mauritius, Iran, and Sri Lanka. For the high trade deficit favored to India resulting, the amount of rupee available for trade is a major point of consideration regarding Bangladesh-India trade.
Thus, ability to deal in local currencies will provide pricing discounts, better exchange rates, and speed of payments to countries opting to do so. The choice of currency for the time being would need to be based on the relative balance of trade that can be overcome through policy and better business practices between the respective countries. In newer devel-opment, Bangladesh will pay Russia $318 million worth of yuan for a loan payment on a nuclear power plant. Western sanctions on Moscow prevented Bangladesh from paying in US dollars.
But apart from local currencies being used to trade bilaterally within countries or within regions, does having multiple glob-al currency financial order of any benefit?
The heightened demand for the dollar increases its value, but this comes at a cost. A stronger currency makes imports cheaper and exports more expensive, which can hurt domestic industries that sell their goods abroad and lead to job losses. During times of economic turmoil, investors seek the safety of the dollar, which squeezes exporters at an already difficult time. This is what Bangladesh is faced at the moment, notwithstanding the reasons for which the foreign exchange crisis germinated.
Through US dollar’s dominance the US economy gets a free lunch in global economy. It ensures that it will always find buy-ers - the rest of the world - of its assets. High global demand for dollars allows the United States to borrow money at a lower cost and amplifies the power of its sanctions, but it also hurts U.S. exports and costs jobs. Think of dollar as a good or service that the US produces, just as China manufactures phones or Japan makes cars. When Americans trade dollars for foreign goods and services, that measures as a US trade deficit, but it can also be seen as America exporting dollars and “dollar services.” The US brands and markets its dollar, just as clothing, cosmetics, or shoe brands and markets their goods.
De-dollarisation benefits include diversified risks, strengthened national currencies, increased monetary policy independ-ence, and reduced vulnerability to US sanctions. Drawbacks encompass transition challenges, potential short-term instabil-ity, and limited global acceptance of alternative currencies.
Unlike any other country in the world, the U.S. dollar has a special place in the global financial system. That’s because it is the global reserve currency. That means that it’s considered as the safest currency there is, with many other countries keeping U.S. dollars in reserve. Many global financial contracts are denominated in U.S. dollars, and many countries who have struggled to maintain a stable currency use U.S. dollars as their own national currency. Right now there are 11 foreign countries that use the U.S. dollar as their official currency. These include Panama, El Salvador, Zimbabwe and Timor Leste. The U.S. dollar has been able to gain and maintain this special status because of the strength of the economy. The U.S. is still the biggest economy in the world by far, with an annual GDP of $23 trillion. Second is China with $17.7 trillion, and way back in third is Japan with $4.9 trillion. All of this is to say, for the U.S. dollar to collapse would take something pretty ma-jor.
Many experts agree that the dollar will not be overtaken as the world’s leading reserve currency anytime soon. More like-ly, they say, is a future in which it slowly comes to share influence with other currencies, though this trend could be accel-erated by the aggressive use of US sanctions and the United States’ waning global leadership.
The writer specializes in international affairs
