- Ajay Sharma
The mighty trend of moving away from using the US dollar as the international reserve and medium of international payment has been seen in recent years in the world economy. Dozens of countries have reduced their reliance on the US dollar and shifted to reserving gold and other major currencies, such as the euro, pound, yen, renminbi, ruble, Australian dollar, etc. These countries have already agreed to enable trade in local currencies as well. India has started purchasing Russian oil in renminbi, Saudi currency, and rubles. India and Malaysia have settled their trade in Indian rupees, while Russia sells oil, coal, and metals in renminbi. Saudi Arabia is considering trading oil in various currencies. This is very important because, since the agreement between the USA and Saudi Arabia in 1945, oil trade has always been in US dollars.
Russia and African countries are planning to trade in local currencies and the Euro. Ghana, the world’s sixth-largest gold producer, has proposed importing oil using gold. For instance, China’s National Company (CNOOC) and France’s Total Energy have imported 65,000 LNG from the UAE using renminbi. Similar trends are occurring in Brazil. China and Brazil signed an agreement earlier this year to enable mutual trade in local currencies. Brazil and Argentina have made a similar type of deal. The Philippines and Thailand have also signed trade deals using non-dollar currencies.
This development shows that the US dollar is losing its universal ‘petrodollar’ status. During an official meeting of all Asian finance ministers and central bank governors in March in Indonesia, reducing reliance on the US dollar and using local currencies for trade among them were discussed. BRICS countries, in particular, want to end their reliance on the US dollar and promote the use of local currencies for cross-border transactions. BRICS poses a challenge to the US dollar and its worldwide dominance. Its expansion could speed up the ability to
transact in local currencies, thus advancing the de-dollarization process.
The recent decades’ official foreign reserve composition has changed remarkably. When looking at the 2000-2022 data, it is clear that the US dollar’s role as the international reserve has been gradually decreasing. Especially since the 2008 global financial crisis, many countries’ central banks have diversified their foreign reserves to include the euro, yen, renminbi, and gold. This shift indicates that the US dollar’s share of global foreign exchange reserves has declined by 10%. It was about 71% in 2000 and dropped to 58% by the end of 2022. Numerous countries have turned to holding gold, with major players like Russia, China, Turkey, and India being the top buyers of gold. The global demand for gold by central banks in the past years has reached its peak. Gold is becoming a safe alternative reserve asset for governments as the US dollar loses its importance.
Why are nations and people so distressed by the US dollar? There are numerous reasons for this. Firstly, at the Bretton Woods Conference in 1944, the US economy was relatively strong, stable, and well-planned.
The SWIFT (Society for Worldwide Interbank Financial Telecommunication) system has existed since 1977. It serves as a major carrier of messages involving planned instructions in transactions. The SWIFT system has quickly expanded and dominated wide-scale interbank operations globally. Regarding the currency composition of SWIFT transactions, the US dollar accounts for 46.5%, the euro for 32%, and the renminbi for 3%. A related issue with SWIFT is that it doesn’t function independently but closely collaborates with the USA’s CHIPS (Clearing House Interbank Payments System), a network of correspondent banks that form the core of payment systems infrastructure operations.
The USA has exerted pressure on Russia by excluding it from the SWIFT system. In response, Russia has developed its own SPFS (System for Transfer of Financial Messages) based on the SWIFT model, although its usage is still limited. China has also developed its own CIPS (Cross-Border Interbank Payment System), which is not modeled on SWIFT but is somewhat similar to CHIPS. China still mainly employs SWIFT for cross-border financial messaging, and CIPS’ coverage remains modest. Both Russia and China need to establish their own cross-border systems due to the USA’s control over SWIFT and CHIPS, which it has used to impose sanctions. While not an immediate change, these efforts by Russia and China could gradually break the USA’s monopoly over the current cross-border transfer system.
BRICS’ aggressive move to establish a common currency for trade among member countries and its expansion could erode the US dollar’s status and global role. The surprising development of digital technology and the digitalization of national economies are creating an environment that could expedite the decline of the US dollar’s monopoly in the world economy. BRICS’ plan to facilitate cross-border trade using local currencies is a positive step in this direction.
Why are nations and people so distressed by the US dollar? There are numerous reasons for this. Firstly, at the Bretton Woods Conference in 1944, the US economy was relatively strong, stable, and well-planned. It possessed ample gold reserves, and the US dollar was backed by these reserves. Its share in the world GDP was around 50%. However, over the decades, the US economy lost these attributes, and its share in the world GDP dropped to about 25%. The US engaged in various destructive wars, such as the Korean War, Vietnam War, Iraq War, and more. It became the world’s leading supplier of war equipment and established hundreds of military bases globally.
In the early eighties, the US dollar lost its gold backing, and its economy became less stable. The USA turned into the world’s leading debtor country. Given this context, the Bretton Woods Conference’s decision regarding the US dollar is no longer valid; it’s outdated and needs to be revised.
Secondly, international currencies are supposed to be neutral, but the USA has not followed this principle. It has weaponized the US dollar, using it as a tool to impose sanctions. The USA has a history of imposing sanctions on not only governments but also enterprises and individuals. Many countries have suffered due to these harsh measures. The US seizes the dollar-denominated assets of sanctioned countries, enterprises, and individuals. For instance, it confiscated seven billion US dollars from Afghanistan and around three hundred billion US dollars from Russia.
The history of US sanctions reveals that the USA consistently uses the US dollar as a geopolitical tool. Countries that don’t have strong, positive relationships with the USA are at the highest risk of sanctions. Emerging countries have recognized the vulnerability of being subjected to sanctions and are thus exploring alternatives.
De-dollarization reflects the power struggle between established world powers and new ones. The old power bloc led by the USA aims to uphold the Bretton Woods decision, while the new power bloc led by Russia, China, and others seeks to challenge it. They believe that the Bretton Woods decision was based on a different global context, particularly the strong economic position and share of the world GDP that the USA held at that time. However, the situation has changed. New regional and international powers have risen, such as Russia, China, India, Iran, Saudi Arabia, the United Arab Emirates, and Brazil.
The US dollar continues to exhibit favorable attributes such as liquidity, stability, and widespread acceptance in global markets.
They are collectively working to offer an alternative to the Bretton Woods system. This challenge to the existing understanding and decisions is their way of asserting their voices and advancing based on the present world situation and the strengths of individual countries. This aligns with the fundamental law of capitalism, the uneven development of capitalist economies. The US dollar serves as a prime example of this principle, as it assumed its position at the Bretton Woods Conference, replacing the UK pound under this fundamental law of capitalist development, the de-dollarization process observed in the global economy shouldn’t come as a surprise. The timeline for the completion of the de-dollarization process, whether short or long, is a question worth considering. In the current capitalist global financial system, an abrupt replacement of the US dollar from its status as the international reserve currency is not feasible.
This transformation will undoubtedly take a significant amount of time. While the authority of the US dollar has waned in certain aspects of the world economy, it still retains its robustness, potency, and unparalleled position compared to other major currencies in critical segments of the international financial structure, including foreign exchange transactions, debt management, and payment settlements. The US dollar continues to exhibit favorable attributes such as liquidity, stability, and widespread acceptance in global markets. It possesses essential features that establish it as the foremost global reserve currency, serving as both a unit and a means of payment. Its characteristics include free convertibility, a deep and extensive financial market, and wide-ranging network externalities embraced by governments, financial institutions, private and official investors, exporters, importers, currency traders, debt issuers, and lenders alike.
Although emerging economies have diversified their foreign reserves to some extent, the US dollar remains steady in trade invoicing and international transactions. Despite experiencing a decline in various financial market sectors, the US dollar still holds its dominance as the world’s primary reserve currency. The strength of the US dollar stems from the USA’s share in the global GDP, its extensive domestic commodity market, its influential NATO alliance, its robust military capabilities, its role as a major military hardware supplier, and its sway over international and regional financial institutions such as the World Bank and IMF. Countries’ significant holdings of US dollar assets are often intertwined with their formal or informal alignment with the US alliance.
Challenging the current dominant status of the US dollar in intricate financial markets and expansive networks, including foreign exchange transactions, debt issuance, and payment settlement, is not an immediate endeavor.
The entrenched position of the US dollar within the global financial system and its status as the world’s reserve currency should not be treated in isolation. Instead, it must be evaluated in the context of US geopolitical influence. As long as the US maintains its geopolitical position, the centrality of the US dollar remains unshaken. Displacing the US dollar’s prominence in the global financial system is a formidable challenge. The quest for a secure alternative to the US dollar represents a primary concern today. However, immediately accepting any single currency as a replacement for the US dollar as the international reserve is met with considerable skepticism. A potential alternative needs to fulfill numerous criteria to rival the status of a major currency like the US dollar.
Euro, yen, pound, ruble, and renminbi emerge as leading contenders to challenge the US dollar’s position. Yet, they grapple with various structural and crucial challenges, encompassing liquidity, stability, and global market acceptance. Challenging the current dominant status of the US dollar in intricate financial markets and expansive networks, including foreign exchange transactions, debt issuance, and payment settlement, is not an immediate endeavor. The ongoing de-dollarization should aim to alleviate excessive reliance on the US dollar, focusing on foreign exchange reserve diversification and exploring alternatives to US dollar trade invoicing. This is a pragmatic step we can undertake now. It doesn’t signify the downfall of the US dollar. Undoubtedly, it will continue to exist with respect and honor, but not as a tool for unilateral coercion. This task should be led by the BRICS+ coalition.
(Author Sharma is a Marxist political economist.)