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De-dollarisation Myths Debunked

Staff writer Mehmet Temur discusses the idea of de-dollarisation with the ambassadors of several Middle Eastern and East Asian countries and shows that there are many obstacles to replacing the US dollar as the world’s reserve currency.

For most of modern history, the US dollar has held the position of the world’s reserve currency. This status has given the US dollar a dominant role in international trade, with the majority of transactions and oil purchases being denominated in dollars. In times of crisis, the demand for dollars normally increases as it is seen as a safe and reliable currency. However, recent headlines have suggested that the dollar’s status as the world’s reserve currency is under threat from the Chinese yuan. Analysts and politicians from both sides of the aisle have raised concerns that this could be the beginning of the end for the dollar’s supremacy and the US’ financial hegemony. But is this really the case?

I visited several Middle Eastern and East Asian countries’ embassies in London and discussed the issue with the ambassadors and first secretaries and in this article, I will examine how serious the threats to the dollar’s dominance are.

History of Dissatisfaction

A reserve currency is essentially a currency that is widely traded and accepted globally. Countries and banks hold reserves of these currencies because they are considered safe and can be used to buy goods and services. Since the end of World War II, the US dollar has held the position of the world’s reserve currency. This has given the US significant advantages in terms of purchasing power and the ability to borrow money. The US has also been able to use the dollar’s dominance to exert control over the global financial system, such as imposing sanctions on countries by excluding them from the SWIFT banking system, which significantly disrupts the target country’s ability to trade in the international markets.

However, this dominance and power have been a source of concern for countries like Russia and China. Russia experienced a financial crisis in the 1990s, which led to many Russians using the dollar instead of the ruble. In response, the Russian Parliament banned public officials from using dollars as a unit of account and there were even proposals to create a new super currency to replace the dollar. China has also expressed dissatisfaction with the dollar’s status as the world’s reserve currency, accusing the US of using it to coerce other countries into serving its political and economic interests. Moreover, the Western sanctions imposed after Russia’s invasion of Ukraine led to the exclusion of key Russian banks from the dollar-denominated SWIFT financial messaging service and the freezing of central bank assets. These actions have given momentum to ongoing efforts by countries such as China, India, Russia or Iran to establish alternative payment and settlement systems.

Specifically, there have been several announcements from Russia and China about their plans to reduce their dependence on the dollar in recent weeks. Russia has pledged to adopt the yuan as the currency of account for payments with countries in Asia, Africa, and Latin America. There have also been reports of other countries like Brazil, France, and Saudi Arabia moving away from the dollar. These developments have sparked anxiety in the US, with some media outlets predicting dire consequences for the American economy and its superpower status if the dollar loses its reserve currency status.

However, it is important to take these reports with a pinch of salt. Similar announcements have been made in the past, but not much has changed. For example, both China and Russia made similar announcements in 2009 and 2013, but the dollar’s dominance has since remained intact. Claims that Brazil is ditching the dollar are also misleading, as it was just one bank in Brazil joining China’s new intra-bank payment system CIPS. Moreover, France’s reported purchase of LNG in yuan is based on a single source, which gave us little knowledge of the whole picture of what took place; and the Saudi’s consideration of switching to the yuan has not yet materialised.

How about Oil?

Oil does not tell a different story. The petrol-exporting Gulf states, despite their deep trade relations with China, face hurdles in transitioning away from the dollar. 

During a recent visit to Riyadh, Chinese President Xi Jinping advocated for Gulf states to switch to the yuan for bilateral trade, including oil. The argument is made that it would make sense for Saudi Arabia and China to trade in their own currencies, especially considering their strong trade ties. During Xi’s meeting with Gulf Cooperation Council (GCC) leaders, he emphasized China’s willingness to import large quantities of crude oil and natural gas on a long-term basis from GCC countries, offering the utilisation of the Shanghai Petroleum and National Gas Exchange (SHPGX) for renminbi (yuan) settlement in oil and gas trade. China has also expressed interest in developing digital currencies that bypass the dollar.

However, switching to the yuan is not straightforward for Gulf producers. It could potentially undermine the “safe haven” status of the dollar, which would pose challenges for Gulf states’ own dollar-pegged currencies. Additionally, the limited volume of yuan in the market is another concern. 

Despite these obstacles, a partial transition focused on non-oil trade could be a starting point. Saudi Finance Minister Mohammed al-Jadaan has stated that Riyadh is open to settling trade arrangements in currencies other than the dollar, signalling a willingness to explore alternative options. While the use of China’s currency in international trade is still limited, with the yuan accounting for only a small share compared to the dollar and the euro, the promotion of central bank digital currencies (CBDCs) could facilitate non-dollar trade in the future. The United Arab Emirates participated in a pilot project for China’s multiple-CBDC Bridge Project, while India has paid for some Russian cargoes in UAE dirham. The Saudi Central Bank has also conducted research into CBDC use.

Can a BRICS Currency Challenge the Dollar’s Dominance?

There have also been talks of the creation of a common currency among the BRICS countries. BRICS, an acronym for Brazil, Russia, India, China, and South Africa, represents a geopolitical counterpoint to the Western G7 bloc. Putin first proposed the concept of a BRICS currency in June of last year and has since reiterated its potential at various international forums.

If realised, a BRICS currency would likely be a common currency, coexisting alongside existing national currencies rather than replacing them entirely like the Euro. However, specific details regarding its structure remain unclear. Some suggest it could resemble the International Monetary Fund’s Special Drawing Rights (SDR), a reserve asset that can be exchanged for major currencies like the dollar, euro, pound, yen, or even the yuan. Others speculate that the currency might be tied to a basket of commodities such as gold or oil. Potential names for the currency include the “BRIC,” “BRIC coin,” or “R5,” referencing the first letter of each BRICS country’s currency.

However, although there may be enthusiasm for a BRICS currency within some member countries, the chances of it materialising and replacing the dollar are slim. Strategic rivalries between countries like China and India would present a significant obstacle to forming a currency union voluntarily. Additionally, countries like Russia and China would need to liberalise their capital flows, a prospect that seems unlikely due to the two countries’ far-reaching protectionist ideology. Moreover, the BRICS countries have vastly different economies, with imbalanced trade relationships and distinct economic challenges. These disparities make the establishment of a common currency complex and potentially problematic, as evidenced by the struggles of deficit countries within the Eurozone.

Dollar Reigns Supreme but Cracks Are Showing

In conclusion, the fall of the dollar in the near future looks unlikely. Its dominant position as the world’s reserve currency is deeply rooted in the long-standing trust and stability of the US economy, its robust financial markets, and its status as the primary vehicle currency for oil trade. These factors make it challenging for alternative currencies to displace the dollar.

China’s ambition to internationalise the yuan faces significant hurdles and would need extensive economic restructuring to happen; similarly, the formation of a BRICS currency faces obstacles such as strategic rivalries, imbalanced trade relationships, and differing economic challenges among member countries.

Nevertheless, there is a growing willingness among many countries to reduce their reliance on the dollar, even if complete abandonment is not feasible or desirable. Particularly, Saudi Arabia’s openness to settling trade arrangements in currencies other than the dollar, such as central bank digital currencies (CBDCs), indicates a willingness to diversify and explore alternative options. While the use of China’s yuan is still limited, the promotion of CBDCs could potentially facilitate a slow shift away from the dollar in the future. In any case, the dollar is here to stay for a while longer.

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