From the end of World War II, the US dollar has dominated the international financial system for nearly eight decades. Now, with the Ukraine –Russia war, another battle is paving the path for several nations to consider replacing the dollar as their primary trading currency. At times, there have been questions raised about the pre-eminence of the dollar, but it has persisted due to the various benefits associated with using the most widely accepted currency for commerce.
Dollar’s global dominance at risk?
In February 2022, Russia’s invasion of Ukraine provoked a wave of US-led financial sanctions on Moscow. The Western governments’ decision to freeze nearly half ($300bn) of Russia’s foreign currency reserves and the exclusion of major Russian banks from SWIFT, an interbank messaging service that facilitates international payments, have been the two most significant sanctions. Others have referred to these sanctions as the “weaponisation” of the dollar. Consequently, the United States’ two main geopolitical opponents, Russia and China, have promoted their own alternative financial infrastructures.
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But, Beijing and Moscow are not the only ones seeking to reduce their dependence on the dollar. In recent months, countries and regions like India, Argentina, Brazil, South Africa, the Middle East, and Southeast Asia have intensified efforts to reduce their reliance on the dollar. Political economists and sanctions specialists suggest that the primary reason for these de-dollarization efforts is the fear in many capitals that the United States may use the power of its currency to target them in a manner similar to how it targeted Russia.
Analysts anticipate that the dollar will continue to be the primary currency for international trade and transactions for the coming years. No other currency comes close to competing with the “King Dollar.” Yet, the dollar’s dominance on the global financial system could lessen if more nations begin trading in other currencies and lower their dollar exposure.
Dollar as financial world’s ‘nuclear option’
Experts say that the US-led sanctions that limit Russia’s ability to use half of its reserves and stop Russian banks from using the important SWIFT system have paranoid many countries and given de-dollarisation efforts a new boost.
Zongyuan Zoe Liu, a fellow for international political economy at the Council on Foreign Relations in New York, stated, “The accelerator this time really is the sanctions imposed on Russia.” She compared the move to expel Russia from the SWIFT system to the use of nuclear weapons in the financial sector. SWIFT’s prominence in international banking is frequently compared to the fame of Gmail in email communication. “In the integrated global financial system, this [cutting Russia off from the use of SWIFT] means you rob them off their blood vessels,” stated Liu. Moreover, analysts worry that countries like China, already targeted by US sanctions in sectors like semiconductor commerce, could be penalised again and have their economy impacted. According to Ahmadi Ali, a sanctions specialist and executive fellow at the Geneva Centre for Security Policy, the world’s second largest economy is “trying to actively move away from the US dollar”. “Once out of SWIFT, you lose the ability to transact across borders easily. You risk being cut out of the global supply chains and it could damage the economy of that country as a whole,” he said.
Attempts of eliminating dollar dominance
In light of the uncertainty caused by sanctions and the conflict in Ukraine, the oil trade between India and other countries offers the most compelling evidence to yet of a possible long-term shift from the US dollar. The nation is the third-largest importer of oil in the world, and Russia became its primary supplier when Europe spurned Moscow’s shipments in response to its invasion of Ukraine, which began in February of last year.
The ambassador of the United Arab Emirates (UAE) to India stated at the beginning of the month that the two countries were attempting to finalise an agreement to trade in their respective currencies, the dirham and the rupee. The UAE is one of India’s leading trading partners. The major economies of Southeast Asia are planning to establish a mobile app system that will allow to trade in local currencies without the need for the dollar as an intermediary. In January, a representative of the Indian Ministry of Commerce told media that Russia, Sri Lanka, Bangladesh, and Mauritius were all interested in conducting business with India with rupees. Several Dubai-based dealers and the Russian energy giants Gazprom and Rosneft are requesting payment in non-dollar currencies for specialty grades of Russian oil supplied in recent weeks at prices higher than $60 per barrel.
On December 5, a group of countries opposed to the war put a limit on how much Russia could charge for oil. Since then, most Indian customers have paid for Russian oil in currencies other than the dollar, such as the United Arab Emirates dirham and, more recently, the Russian rouble, oil trading and banking sources said. Last month, the US and UK sanctioned Moscow and Abu Dhabi-based Russian bank MTS, making dirham payments for Russian oil more difficult. In January, the presidents of Brazil and Argentina announced that they will establish a unified currency to settle trade transactions.
“King dollar” at the verge of being dethroned?
When a currency may be easily traded and swapped for other currencies on international financial markets and in international trade, it is said to be completely convertible. Despite China’s ever-increasing influence on the global economy, the Yuan is convertible only for certain purposes, such as trade, limiting its value. Experts are unconvinced that any non-dollar currency will dethrone the dollar in the near future, despite the efforts of non-dollar-using nations. “The only currency that can replace the US dollar in the long run is the renminbi, but for it to ever take up that role, the currency has to be fully convertible,” Alicia García Herrero, a senior fellow at the Brussels-based think tank Bruegel remarked. “I don’t think that will happen in the foreseeable future,” she added. In addition, some experts feel that although de-dollarization would not result in the replacement of the dollar with another dominating currency, it could pave the way for non-dollar economic operations. “Just how far they’ll succeed though is hard to tell at this point,” Ali said.
Commodity-based economies, such as those of Argentina and Brazil, are dominated by the US dollar. “When dealing with other countries, they will remain dependent on the dollar,” Liu said. She also noted that a number of nations, including Saudi Arabia and the United Arab Emirates, still peg their currencies to the dollar. For now, it is safe to say that dollar dominance is not getting lower in the long run and it will be difficult for these nations to escape the dollar’s hold.