By Cary Springfield, International Banker
It has been around six months since the start of the war between Russia and Ukraine. During this time, the world has keenly witnessed seismic shifting trends across economic, geopolitical and cultural lines. But perhaps the most profound impact the conflict has had (and continues to have) on the world is the acceleration it has inspired towards multipolarity—that is, global power more evenly distributed amongst several advanced economic nations rather than contained within a single hegemonic power, which in this case is the United States. Underpinning much of this acceleration, moreover, is the trend of de-dollarisation.
It should be highlighted from the outset that de-dollarisation has been, observably, a long-term process that emerged over the last two decades. A March paper from the International Monetary Fund (IMF) found that the dollar still plays “an outsized role” in global markets despite the US economy representing a shrinking share of global output over the last two decades and that its dominant role in global trade, international debt and non-bank borrowing still far outstrips the US’ share of trade, bond issuance, and international borrowing and lending.
But the IMF also noted that central banks today are not holding the greenback as reserves in the same quantities as yesteryear. “The dollar’s share of global foreign-exchange reserves fell below 59 percent in the final quarter of last year, extending a two-decade decline, according to the IMF’s Currency Composition of Official Foreign Exchange Reserves data,” the paper stated. “Strikingly, the decline in the dollar’s share has not been accompanied by an increase in the shares of the pound sterling, yen and euro, other long-standing reserve currencies…. Rather, the shift out of dollars has been in two directions: a quarter into the Chinese renminbi, and three quarters into the currencies of smaller countries that have played a more limited role as reserve currencies.”
Why is this the case? Seemingly, a multitude of factors are responsible. For one, it appears the world has reached something of a tipping point this year. With around one-quarter of the global population suffering from the direct impact of US-led economic sanctions, which invariably diminishes their ability to trade and perform other necessary economic and financial activities that are often priced using the dollar, it should perhaps come as no surprise that de-dollarisation has intensified across the world. Indeed, this trend often simply reflects the desperation of some countries to survive, let alone thrive, with brutal sanctions having remained on countries during the COVID-19 pandemic proving devastating in some cases.
“The destructive impact of said measures at the national level, plus their extraterritorial implication, together with the phenomenon of over-compliance and the fear for ‘secondary sanctions’, hinder the ability of national governments in procuring even basic medical equipment and supplies, including coronavirus test kits and medicine,” a joint March 2020 letter from the governments of China, Cuba, Iran, Nicaragua, North Korea, Russia, Syria and Venezuela—all bearers of US-led sanctions—to the Secretary-General of the United Nations, the Office of the United Nations High Commissioner for Human Rights and the Director-General of the World Health Organization (WHO) read. The letter called for an end to sanctions, which “illegal[ly] and blatantly violate international law and the charter of the United Nations”, and that it was a “hard if not impossible deed for those countries who are currently facing the application of unilateral coercive measures” to cope.
Sanctions have also played a critical role in the ongoing conflict in Eastern Europe. Indeed, as the schism has continued to widen this year between the West, dominated by the United States, the European Union (EU) and Japan, versus the Eastern powers of China and Russia, there have been a number of concerted moves by the latter to wean themselves off their reliance on the greenback. For Russia, de-dollarisation began around 2014 after it annexed Crimea, which was executed in response to what it perceived was a US-backed coup d’état in Ukraine. The Western sanctions that followed the annexation drastically reduced Russian entities’ ability to raise capital in Western markets, which forced Moscow to reduce its dollar holdings and dramatically increase its exposure to alternative assets, such as gold.
Since the outbreak of war this year and the imposition of further economic sanctions against Russia in response, Moscow has only further expedited this de-dollarisation process. Having been excluded from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system, which banks use globally to transfer funds, Russia first hiked its key interest rate to 20 percent to protect the ruble, imposed further capital controls to prevent excessive currency from leaving its shores and insisted that all “unfriendly” countries pay only in rubles for its vast exports of fossil fuels.
More recently, Russia has been busy agreeing on bilateral fuel deals with several countries involving at least partial payment in rubles rather than dollars. For instance, it signed a roadmap for economic cooperation and trade with Turkey worth $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 the Russian Mir payment system, helping Russian tourists in Turkey to use their currency.
Domestically, meanwhile, Russia’s largest exchange, Moscow Exchange, announced on August 8 that it would halve the maximum threshold of dollars it can accept as collateral to underwrite transactions from 50 percent to 25 percent. Any sums exceeding this limit would have to be converted into “friendlier” alternatives. And Moscow Exchange has also started trading bonds denominated in the Chinese yuan to attract Asian investors and further diversify away from the greenback. “Debt instruments denominated in the Chinese yuan open up an additional source of forex liquidity for Russian borrowers,” said Gleb Shevelenkov, head of the debt market at Moscow Exchange.
Speaking of the yuan, China’s rapidly growing global economic might may pose the biggest threat to the dollar’s status as the world’s reserve currency. And its recent forays into Middle Eastern markets—Saudi Arabian oil in particular—could ultimately go a long way towards tipping the scales in favour of widespread adoption of the Asian superpower’s currency. Indeed, part of how the US dollar rose to global supremacy in the first place has been down to its role as the de facto currency used in global commodities markets. Commonly known as the “petrodollar”, the requirement for the massive value of global oil sales to be denominated in the dollar has gone a long way towards guaranteeing the credibility of the currency, particularly after the US left the Bretton Woods system of monetary management in 1971, which severed the dollar from its backing of gold bullion.
Since then, the petrodollar has thus been crucial in maintaining global dollar hegemony. “The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency,” economist Gal Luft, co-director of the Washington-based Institute for the Analysis of Global Security and co-author of the book De-Dollarization: The Revolt Against the Dollar and the Rise of a New Financial World Order, explained to the Wall Street Journal. “If that block is taken out of the wall, the wall will begin to collapse.”
Cue the “collapse”? Perhaps not completely or imminently, but relations between the US and Saudi Arabia have visibly soured in recent years at the same time as the world’s largest oil exporter has demonstrated a distinct warming to China. Over one-quarter of Saudi oil exports were snapped up by China in 2020, while state oil behemoth Saudi Aramco also recently concluded a $10-billion deal with Chinese petroleum companies. And with reports suggesting that oil transactions between the two countries could well be priced in yuan in the near future, this would dramatically raise the Chinese currency’s global profile and severely dent the petrodollar’s worldwide dominance.
With China extending billions of dollars of investment funding to Saudi Arabia this year and relations between President Xi Jinping and Crown Prince Mohammed bin Salman on the rise, therefore, things could develop rather quickly in favour of the East. “The dynamics have dramatically changed. The US relationship with the Saudis has changed. China is the world’s biggest crude importer, and they are offering many lucrative incentives to the kingdom,” an unnamed Saudi official told the Wall Street Journal in March. “China has been offering everything you could possibly imagine to the kingdom.” And while some analysts believe a wholesale shift onto yuan pricing is unlikely, others believe that a partial shift would enable payments to Chinese contractors currently involved in mega projects within the kingdom.
Other than the petrodollar, the US has also historically propped up its currency by issuing government debt to other nations, which has helped to finance its budget deficit. During the 2008 global financial crisis, China came to the US’ rescue by purchasing enormous quantities of US Treasury bills. Indeed, by 2010, China held more than $1 trillion in US Treasuries, and between 2008 and 2013, its foreign-exchange reserves—US debt-instruments holdings—expanded by a mammoth $2 trillion.
But in July, it was revealed that China’s holdings of US debt had fallen back under $1 trillion for the first time in 12 years, extending a trend of offloading US Treasuries that began in 2017 as the trade war waged by the US against China intensified. Given the further deterioration in relations between the two economic heavyweights that has transpired this year, it would thus appear that China is now keener than ever to rid itself of its dollar exposure. “They’re unhappy with the way the U.S. keeps using financial sanctions around the world,” David Dollar of the Brookings Institution’s China Center told Marketplace in July. Referring to the decision to kick Russia off SWIFT, Thomas Hogan of the American Institute for Economic Research added that this was “a major wake-up call” for China and other nations not fully aligned with Western political goals. “They realize that the SWIFT system could be used as a political weapon to harm them economically.”
Even developing nations are getting in on the act in clear acts of defiance against the dollar empire. Egypt, for example, has suffered greatly under the weight of borrowing as it seeks to stabilise its economy and prop up the value of the Egyptian pound. Indeed, the country’s sovereign debt has roughly quadrupled in the last 10 years as it has repeatedly sought financial support from US-led development institutions such as the IMF. But the cost of servicing this dollar-denominated debt has seriously dented Egyptians’ living standards amidst a deteriorating global economic landscape.
Cairo’s solution? Issuing yuan-denominated debt to raise funding in the Chinese bond market for the first time, a move announced as a realistic option by the Minister of Finance Mohamed Maait in May 2022. “The growing mountains of debt and high cost of borrowing in USD is forcing Egypt to seek alternative windows for funding to avert a potential sovereign debt crisis and a collapse in EGP’s purchasing power, which could destabilise society and the government,” Magdy Abd Alhadi, an Egyptian economist, told The New Arab news publication. Independent analyst Firas Modad added, “Egypt imports a large amount of goods and services from China, including for the construction of the New Administrative Capital. This requires Egypt to have access to the yuan. It is likely cheaper to borrow in yuan than to borrow in dollars and convert to the yuan.”
What does all this say about the dollar’s credibility in 2022? For some, de-dollarisation can be viewed as an expression of a loss of confidence in the US currency as a safe haven—a status that the dollar has enjoyed for decades—and a preference for seeking safety in alternative assets, such as gold and other currencies.
A survey published in June by the World Gold Council (WGC), for instance, found that 80 percent of the 57 central banks it surveyed expect to expand their gold reserves within the next year, particularly those within emerging markets and developing economies (EMDEs). “More EMDE respondents regard ‘shifts in global economic power’ as a relevant factor in their reserve management decisions, which could indicate growing concerns over the threat of a decoupling between major economies amid ongoing tensions,” the report stated, adding that 42 percent of respondents expect the dollar to decline as a proportion of total reserves in the next five years as they—EMDE central banks in particular—are now less confident in the role of the US dollar as a global reserve currency.
Of course, one might well scoff at the notion of the world being governed by any currency other than the US dollar in the near future. But as this year has shown, global dynamics can shift quickly. As one of Russia’s most revered figures famously said, “There are decades where nothing happens; and there are weeks where decades happen.” We are now observing such “weeks”. Given the massive power plays undertaken by the US, China, Russia and many other nations, the seemingly unstoppable rise of global multipolarity can only mean the further weakening of the dollar’s supremacy. One wonders whether the US has the wherewithal to successfully pivot away from its prevailing foreign-affairs approach to prevent it.