The De-dollarization of the World Economy

In 1971, the US government, faced with stagnant inflation and a major global financial crisis, announced the US withdrawal from the Bretton Woods system of agreements, which meant that, in technical terms, all currencies became coin-to-currency currencies. to be regulated in the financial markets.

Of course, the changes brought about by the abandonment of the Bretton Woods agreements, first and foremost by the United States itself, did not lead to a collapse of American hegemony and rather created conditions for the dollar to remain at the center of the world economy as an international reference currency.

And one of the changes was the advent of oil-dollars. The United States and Saudi Arabia have agreed to set oil prices in dollars. This meant that any country that wanted to buy oil had to first buy dollars to buy oil. This created an international market for dollars, and this was further exacerbated by the fact that futures contracts and all oil-related transactions were also priced in dollars.

This, of course, had the effect that the value of oil was also affected by fluctuations in the dollar exchange rate or US inflation. But at the same time it was securing the dollar as the world reference currency.

After all, the US government realized very early on that this allows it to have unlimited access to lending to meet its needs, without anyone wondering how truly indebted the US is.

But lately, the United States has chosen a peculiar military “tooling” of the dollar, mainly through the logic of sanctions aimed at cutting off entire economies from the dollar-dominated international trading networks.

This was evident in the way in which Russian banks chose to cut themselves off from the SWIFT international trading system and in the way in which they seized the foreign reserves of the Russian central bank abroad, in an attempt to undermine the ability of the Russian central bank to defend its equity. of the ruble but also to be able to repay the part of the debt that is in foreign currency (although there was an announcement that Russia can always pay in rubles).

What does Saudi Arabia’s decision to price oil in yuan mean?

Saudi Arabia is in talks with Beijing to price part of its yuan oil sales, a move that shifts the world’s largest crude oil exporter to Asian markets.

Discussions have not begun now, but they appear to have been accelerated by Riyadh’s growing dissatisfaction with the way the United States is not fully implementing its security commitments to Saudi Arabia.

And of course China is not a random customer, as it buys more than 25% of the oil exported by Saudi Arabia. This in turn means that pricing such large quantities of oil in yuan will strengthen the position of the Chinese currency, as it will also give it the characteristics of an international reference currency.

Suffice it to say that most oil sales in the world are made in dollars, and so far the Saudis have sold oil exclusively in exchange for dollars, since that was exactly the agreement they made with the US in exchange for security guarantees.

For its part, China already in 2018 had tried to secure the possibility of oil futures contracts in yuan to boost the international profile of its currency. Of course it had not managed to have a great impact.

In any case, the way in which a currency acquires the characteristics of an international reference currency has to do with whether they are used by central banks for foreign exchange reserves and with the scale at which they are used to purchase goods and services outside national borders.

At the end of 2019, according to IMF data, the official foreign exchange reserves of central banks were 60.75% in dollars, 20.59% in euros, 5.87% in yen, with the yuan / renbib representing only 1 , 94%. It remains to be seen whether the growth of petroyuan this time will lead to higher placements in yuan.

The “tool” of sanctions and De-dollarization

In recent years, the United States has used a variety of ways to impose sanctions, with the key element being trying to overturn in advance the ways in which countries could circumvent sanctions, mainly through “secondary sanctions” mechanisms against companies and countries that would traded with countries to which the US has imposed sanctions, even if they are unilateral and apply only to the US.

Now, they are applying in Russia the practices of “cutting off” from the international financial networks that they had tried in the past, mainly to the detriment of Iran. This is accelerating the concern of countries like China – which is subject to sanctions mainly for its access to certain high-tech products – to be able to trade without the mediation of the dollar.

Russia and the countries of the Eurasian Economic Union (which besides Russia include Kazakhstan, Kyrgyzstan, Belarus and Armenia), which has agreed with China on the formation of an independent international monetary and financial system, are moving in this direction anyway. systemic.

After all, regardless of the reality of the various sanctions, there are also the needs of the markets, especially if we consider the demand for products such as oil. It is characteristic that even a country like Iran, where it is still under sanctions, if its nuclear program negotiations are not completed, can and does have significant oil exports. And of course Russia continues to normally sell natural gas in Europe but also oil in countries such as. India.

In this sense, one could say that the US, by trying to “instrumentalize” the dollar, in the context of global competition that is rather largely economic, is in danger of accelerating what it is trying to prevent, namely the emergence of a more polycentric world at the economic level.

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TRUST ECONOMICS

Trust Economics is a specialized independent economic research, analysis and consultancy business. Our team provides ingenious analysis in the macro & micro economic field, in the field of financial market, regional and sectoral analysis equally, forecasts, consultancy, specialized studies-research/projects from its headquarters in Athens, Greece.

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