The Post-Dollar World Is Coming – OpEd
Over the past few months, a series of important events have happened that herald the collapse of the global economic order and the demise of US dollar.
First, Saudi Arabia’s finance minister said the kingdom had no objection to selling its oil in a currency other than the US dollar. The proposal came after Chinese President Xi Jinping, at the first Summit of China and Arab States hosted by Saudi Crown Prince Mohammed bin Salman in Riyadh last month, called on Gulf states to use the Chinese yuan for oil and gas trades with China. At a recent annual gathering in Davos, Saudi Foreign Minister Mohammed al-Jadan reiterated that the kingdom is ready to exchange its oil with China for the yuan.
This decision by Saudi Arabia, as the world’s largest crude oil exporter and until recently the centerpiece of U.S. strategy in the Middle East, can be a game-changer. This means that the Kingdom, in keeping with Russia as the world’s second-largest exporter of this product, is no longer looking to trade oil in dollars alone.
The United States was once the world’s largest importer of Saudi crude oil. Today, however, it is no longer the case and China has replaced it. In fact, China is currently not only the largest importer of crude oil and petrochemical products from Saudi Arabia, but also the largest buyer of oil and its products from all the Gulf states. Therefore, it would not be farfetched if, at some point in the future, Saudi Arabia and China put away dollar to trade in a currency that is more in line with their national interests. However, the news of the yuan’s link with energy (Petroyuan) is absolutely not good news for the dollar-based system, and in some ways, along with other factors, reinforces the process of transformation in the existing international order.
In response to western sanctions, Russia has begun pricing its crude oil and gas exports to the ruble in trade with countries it considers unfriendly since last year. According to Gazprom’s agreement with the National Petroleum Corporation of China, Russian oil and gas sales to the country will be made with yuan and rubles. Moscow is also trying to persuade other BRICS members like Brazil, India, and South Africa to trade using a common currency. There are also talks about creating a common currency to facilitate and develop trade among the member countries of the Shanghai Treaty.
On the other side of the world, Argentina and Brazil, South America’s two largest economies, unveiled the currency integration plan of the two countries in a joint statement as well. This plan is aimed at removing trade barriers between the two countries, facilitating exports and imports, and solving the problem of currency fluctuations, and if successful, reduces executive costs and external risks resulting from the shortage of dollars as the main intermediary currency in international buying and selling. With the creation of a common currency, the trade process of exports and imports between the two countries is facilitated, especially for Argentina, which has long suffered from a shortage of dollar foreign exchange reserves. This economic sphere will become the second largest currency bloc in the world after the European Union.
This is not the first time Brazil and Argentina have considered this idea, but the lack of political stability and macroeconomic problems have so far hindered its implementation. Now, with leftist and independent governments in both countries, there is a greater willingness to create a new currency apart from the dollar system. The implementation of this agreement, considering its previous failures is undoubtedly not going to be easy. However, it is hoped that with the realization of this project and the joining of other South American countries, this foreign exchange area will be able to act as an alternative to the dollar over time.
Put together, these events demonstrate the change of the world’s economic order and the demise of the US dollar. However, the US dollar has several structural advantages that other currencies have not enjoyed.
Firstly, according to the IMF, the dollar still accounts for 60% of global foreign exchange reserves, although this figure is down 10% from 70% in 2000. Secondly, the Chinese government strictly controls the yuan – the biggest potential competitor of the dollar – and does not allow its conversion to any other currency, which reduces its circulation and liquidity. Thirdly, U.S. credit markets and government-backed or Treasury-backed bonds are the most prestigious and liquid bonds in the world. And finally, it has the full support the U.S. government, which gives it the credibility that other central banks and asset managers around the world count on. However, these advantages and credits are now at risk.
For instance, the U.S. government $31 trillion debt continues to grow bigger and bigger. After the government’s catastrophic default in 2011 by accepting an increase in the debt ceiling, Republicans this time rejected this policy. This situation can lead to more debts for the government as it might not be able to meet its financial obligations. Such an event has a domino effect, the final consequences of which are unknown, but it is likely to be catastrophic for the dollar’s future as a global currency reserve since it has shaken investors’ and central banks’ confidence in the U.S. economy at an unprecedented rate.
Continued polarizations among policymakers of the two major parties, and political instability in Washington, will also call into question the assessment of central banks around the world regarding the long-term viability of the dollar as the most important reserve currency, simply because Democrats and Republicans cannot and basically do not want to put aside their political differences in line with the long-term interests of the country.
Moreover, the U.S. explicit and repeated use of the dollar as a weapon to perpetuate its hegemony has provided a powerful incentive for U.S. competitors to seek alternative mechanisms of payment and settlement. China and Saudi Arabia, as well as many oil-exporting countries, have similarities in governance. For years, they have seen how the United States turned the dollar into a weapon, using it as a powerful tool to enforce international governance. Russia’s invasion of Ukraine and the Western coalition’s ability to freeze Russia’s foreign exchange reserves (around $300 billion) will be a concern for any government whose policies do not always align with U.S. policies.
In sum, the decline of the U.S. dollar is due to a combination of factors, including the increasing growth of the debts of the United States government and the risk of their default, the intensification of polarization and political instability in the United States, and the historical record of this country regarding the use of the dollar as a weapon and tool for advancing foreign policy goals. These issues have created the necessary motivation to find non-dollar exchange mechanisms, to use other currencies in commercial transactions, and in general to change the financial order governing the world, especially for US rivals.
According to foreign policy experts we will have either a bipolar world or a multipolar world, in which the currency reserves of Washington’s allies remain in dollar but emerging powers such as Turkey, Saudi Arabia, South Africa, India, Brazil will have more choices regarding the nature of their currency reserves. The decline of the dollar will undoubtedly lead to the decline of the U.S. economic capabilities and soft power.
