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Dedollarisation could threaten dominance of Dollar

Dedollarisation could threaten dominance of Dollar


Dedollarisation is a process of substituting US dollar as the currency used for:

(i) Trading oil and/ or other commodities (i.e. petrodollar),

(ii) Buying US dollars for the forex reserves,

(iii) Bilateral trade agreements, and

(iv) Dollar-denominated Assets, Investments & Loans.

History of US Dollar’s dominance

USA dollar began to displace the pound sterling as international reserve currency from the 1920s since it emerged from the 1st World War relatively unscathed and since the USA was a significant recipient of wartime gold inflows.

After USA emerged as an even stronger global superpower during the 2nd World War, the Bretton Woods Agreement of 1944 established the post-war international monetary system, with US dollar ascending to become the world's primary reserve currency for international trade, and the only post-war currency linked to gold at $35 per troy ounce. Despite all links to gold being severed in 1971, the dollar continues to play this role to this day.

Since the establishment of Bretton Woods’s system, the US dollar is used as the medium for international trade. The USA’s Department of the Treasury exercises considerable oversight over the SWIFT financial transfer network, and consequently has a huge sway on the global financial transactions systems, with the ability to impose sanctions on foreign entities and individuals. In recent years, several countries are transitioning to trade in national currencies.

This status of the reserve currency allows the US government to refinance its debt at low costs in addition to providing foreign policy leverage. Currently, about 60 % of foreign exchange reserves of central banks and about 70 % of global trade is conducted using USD. The association of the USD as a “safe-haven” asset also has a psychological angle to it and like old habits, people continue to view the currency as a relatively risk-free asset. Given this psychological bias, the world will continue to prefer the USD as a “store of value” and a “medium of exchange”, fulfilling the basic functions of money.

SWIFT and the Weaponisation of USA Dollar

SWIFT stands for the “Society for Worldwide Interbank Financial Telecommunication” & the system enables financial institutions to send and receive information about financial transactions in a secure, standardized environment. Since the dollar serves as the world reserve currency, SWIFT facilitates the international dollar system. USA has used the system as a “stick” in the past also. SWIFT and dollar dominance give USA a great deal of leverage over other countries. All wire transactions settled in U.S. dollars must go through U.S. banks, which Washington can freeze through a variety of tools.

In practice - in 2018 America’s Treasury imposed legal measures to prevent the Russian aluminum firm RUSAL from accessing the dollar-centric financial system, making it unable to access counterparties and Western clearing houses. Since then, USA developed over 30 active financial and trade sanction programs. USA also imposed measures on Iran saying it would “cut off billions of dollars of support to the Iranian regime.” Similar statements were made regarding Iraq, which restricted its use of oil revenues. The State Department reiterated that Iraq could lose access to its government account at the Federal Reserve Bank of New York, which would flatten its economy.

Continuing down this path could trigger de-dollarization and an ensuing currency crisis.

Economic Warfare

USA doesn't only project power across the globe through its massive military but it also weaponises USA dollar, using its economic dominance as both a carrot and a stick. USA government showers billions of dollars in foreign aid to "friends", who could be dictators. On the other hand, "enemies" can find themselves locked out of the global financial system, which USA effectively controls using the dollar.

Why ‘de-dollarisation’ is imminent

U.S. financial hegemony backfires as countries opt for de-dollarization

Much has been written on how the weaponisation of trade, the imposition of sanctions and the exclusion from SWIFT by the US could trigger a faster de-dollarisation as countries displaying diplomatic and economic autonomy will be wary of using US-dominated global banking systems. This school of thought avers that this can also trigger a shift in the overall global forex market framework as potential foreign policy coercion or sudden disruptions will not go down kindly with countries, which will start exploring how to build bulwarks.

· With USA dollar being increasingly weaponised by a self-serving Washington, countries have been seeking reliable alternatives to regain financial independence.

· The US dollar, which is the world’s reserve currency, can see a steady fall in the current context as leading central banks may look to diversify their reserves away from it to other assets or currencies like the Euro, Renminbi or Gold. The US dollar's share of global reserves is expected to continue its downward trend as emerging market and developing economy’s central banks seek further diversification in the currency composition of their reserves. The “de-dollarization” by several central banks is imminent, driven by the desire to insulate them from geopolitical risks.

· For many economies, America's sizable economic toolkit remains a menace, which has forced them to toe USA’s line or risk being cut off from the global financial market at Washington's whim.

· As USA presses on with its financial hegemony, countries, especially those in the Global South, are sobering up to Washington's egoism and exploring paths to break away from the dollar & fend for them-selves.

· The notion of de-dollarization sits well in the thought experiment of a multipolar world where each country will look to enjoy economic autonomy in the sphere of monetary policy.

Expert’s take

Ø Jeffrey Sachs said the role of the dollar is shrinking as the share of USA economy in the world economy declines. The process has been accelerated as USA repeatedly resorts to sanctions and with the rise of digital settlements, "because U.S. financial power depends heavily on the control of the SWIFT settlements system, which will also diminish in importance. USA has gotten into a bad habit of confiscating the central bank reserves & private assets of other countries,”

Ø "We should keep one thing in mind. Why should our companies continue to toe the Western countries' line or dictates in choosing or not choosing, a particular currency for making payments," an Indian official said. "Every private company works for earning profits, and decisions like choosing a currency for making payments should be left to those companies alone. They believe that a problem with the current international financial system is a dominant dollar that doesn't support any other currency to come up, even Euro or Yen. But now new trends are setting, and countries are willing to take chances in trading outside the dollar,”

Ø One Russian expert said that Washington's "weaponisation" of financial instruments has inevitably undermined trust in USA dollar as the main reserve currency and means of payment, prompting a weighty argument in favor of a wider use of other currencies.

Ø Gita Gopinath, the IMF's first deputy MD, said that “the unprecedented financial sanctions imposed on Russia, including restrictions on its central bank, threaten to gradually dilute the dominance of USA dollar and result in a more fragmented international monetary system. The dollar would remain the major global currency even in that landscape, but fragmentation at a smaller level is certainly quite possible," The sweeping measures imposed by Western countries could encourage the emergence of small currency blocs based on trade between separate groups of countries.

Ø “The US debt machine and standard of living can only be maintained under the petrodollar standard.”― Kelly Mitchell, Gold Wars

Ø Rivalry with China, fallout from Russia's war in Ukraine and wrangling once again in Washington over the U.S. debt ceiling have put the dollar's status as the world's dominant currency under fresh scrutiny.-Reuter

Ø The dollar-based monetary order is already being challenged in multiple ways: the spread of de-dollarisation efforts & central bank digital currencies (CBDCs). De-dollarisation is not a new theme. It started with the launch of quantitative easing in the wake of the financial crisis, as current account surplus countries frowned at the idea of negative real returns on their savings.-FT

Russia & China’s de-dollarization partnership

Russia and China — have already started this process of de-dollarization.

Efforts are already underway for the possible introduction of a new Russia-China payment system, bypassing SWIFT and combining the Russian SPFS (System for Transfer of Financial Messages) with the Chinese CIPS (Cross-Border Interbank Payment System).

On March 17, 2022, Anatoly Aksakov, Chairman of the State Duma Committee on the Financial Market, announced that the Bank of Russia and the People's Bank of China are working on connecting the Russian and Chinese financial messaging systems. He also pointed to the beginning of the development of information transfer schemes using blockchain, including the digital ruble and the digital Yuan. On March 31, 2022, the Economic Times published information that India has offered Russia a new transaction system with the transfer of trade to the ruble and SPFS, which will work through the Reserve Bank of India and Russia's Vnesheconombank.

China aims to use trading platforms and its digital currency to promote de-dollarization.

Russia had started its three-pronged efforts towards de-dollarization in 2014 when sanctions were imposed on it for the annexation of Crimea:

1) First, Russia reduced its share of dollar-denominated assets to about 16 % in 2021. It had already announced that it would be cutting the USD from its $186 billion National Wealth Fund.

2) Second, it reduced its share of trade conducted in USD by prioritizing national currencies in bilateral trade. The use of US Dollar in Russia’s exports to BRICS crashed from about 95 % in 2013 to less than 10 % in 2020.

3) Third, Russia also developed a national electronic payments system called “Mir” in 2015 after several payment processing firms denied services to Russian banks.

However, these steps haven’t sufficed to effectively shield “fortress Russia”.

Russia’s de-dollarization efforts mean that China and India can help Russia skirt sanctions by jointly building an alternative global financial system.

Russia and China signed a massive energy deal over the summer, a $400 billion contract for Russia to supply China with gas.

An unintended consequence of Western punitive sanctions could be strengthening a Russia-China de-dollarization partnership. Joining such a partnership may also appeal to India. India has reportedly expressed interest in jointly exploring with Russia and China an alternative to SWIFT that would allow it to trade with countries under U.S. sanctions. India has also had to work out alternative arrangements, including a barter arrangement, with certain sanctioned countries in the past.

BRICS countries are creating a single payment system, BRICS Pay, as part of the drive to establish a common system for retail payments and transactions between the member countries. In the near future, these countries plan to introduce a special cloud platform, which will connect their national payment systems.

The Eastern hemisphere and leadership are growing with an anti-dollar alliance. In fact, there are 23 (60% of the world’s GDP) countries that are setting up swap lines that bypass the dollar and SWIFT payment system, the dollar-based worldwide transaction network. The countries that are setting up swap lines are also US allies such as Germany, France & UK.

Here is a list of swap line examples that bypass the dollar

Ø March 22, 2012 – Australia and China agreed to a 30bln AUD / 200bln Yuan swap line agreement.

Ø March 26, 2013 – Brazil and China set up a currency swap line for 60bln BRL / 190 bln Yuan.

Ø June 22, 2013 – Britain officially set up a currency swap line with China for 2 bln GBP/ 200bln Yuan.

Ø October 9, 2013 – The European Union created a swap line with China for 45bln EUR/ 350 bln Yuan.

Ø November 8, 2104 – Canada and China have agreed upon a 30bln CAD/ 200 bln Yuan currency swap.

Since 2008, a weak US economy has contributed to the decline of global dollar reserves and created opportunities for the rest of the world. This has resulted in a decline of American influence globally and increased the momentum for a de-dollarized world.

A new post-dollar world

Fewer foreign buyers for US Treasuries

Putin says ‘unfriendly countries’ must buy Russian oil and gas in rubles.

Russia has put the Ruble on a gold standard

Russia also began buying gold from banks at a fixed price of 5,000 rubles (roughly $61) per 1 gram.

Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales US warns India against increasing oil imports from Russia, says ‘great risk’

Sudden dumping of dollar assets by adversarial central banks will also pose balance sheet risks to them as it will erode the value of their overall dollar-denominated.

As per USA- the Russian threat to dollar hegemony is nothing but a fantasy

CA Harshad Shah, Mumbai


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